Three-year bonds sell at an interest rate of 4.5%. 3.25-year bonds sell for 4.4%. You are sure for sure that in three months the price of both of them will be 4.7%. You can go short $200 million faces of any instrument. How much money do you expect to make in three months?

Transcribed Image Text:

The Black-Scholes formula is C(S, K,T,t)=SN(d)- P{(T-t)KN(d- o(T-t)⁰.5), Where d=[(In (S/P+(T-t)K))/( ©(T-t)⁰.5)]+0.5 (T-t)⁰.5. Here is a normal distribution Normal Distribution Table N(X) X X N(X) N(X) X N(X) X -3 0.0013 -2.25 0.0122 -1.5 0.0668 -0.75 0.2266 -2.975 0.0015 -2.225 0.0130 -1.475 0.0701 -0.725 0.2342 -2.95 0.0016 -2.2 0.0139 -1.45 0.0735 -0.7 0.2420 -2.925 0.0017 -2.175 0.0148 -1.425 0.0771 -0.675 0.2498 -2.15 0.0158 -1.4 0.0808 -0.65 0.2578 -2.9 0.0019 -2.875 0.0020 -2.125 0.0168 -1.375 0.0846 -0.625 0.2660 -0.6 0.2743 -2.85 0.0022 -2.1 -2.825 0.0024 -2.075 0.0179 -1.35 0.0190 -1.325 0.0885 0.0926 -0.575 0.2826 -1.3 0.0968 -0.55 0.2912 -2.8 0.0026 -2.05 -2.775 0.0028 -2.025 0.0202 0.0214 -1.275 0.1012 -0.525 0.2998 -2.75 0.0030 -2 0.0228 0.1056 -0.5 0.3085 -1.25 -1.225 0.1103 -0.475 -2.725 0.0032 -1.975 0.0241 0.3174 -2.7 0.0035 -1.95 0.0256 -1.2 0.1151 -0.45 0.3264 -2.675 0.0037 -1.925 0.0271 -1.175 0.1200 -0.425 0.3354 -2.65 0.0040 -1.9 0.0287 -1.15 0.1251 -0.4 0.3446 -2.625 0.0043 -1.875 0.0304 -1.125 0.1303 -0.375 0.3538 -1.85 0.0322 -1.1 0.1357 -0.35 0.3632 -2.6 0.0047 -2.575 0.0050 -1.825 0.0340 -1.075 0.1412 -0.325 0.3726 -2.55 0.0054 -1.8 0.0359 -1.05 0.1469 -0.3 0.3821 -2.525 0.0058 -1.775 0.0379 -1.025 0.1527 -0.275 0.3917 -2.5 0.0062 -1.75 0.0401 -1 0.1587 -0.25 0.4013 -2.475 0.0067 -1.725 0.0423 -0.975 0.1648 -0.225 0.4110 0.4207 -2.45 0.0071 -1.7 0.0446 -0.95 0.1711 -0.2 -2.425 0.0077 -1.675 0.0470 -0.925 0.1775 -0.175 0.4305 0.0495 -0.9 0.1841 0.4404 -2.4 -2.375 -2.35 0.0094 0.0082 -1.65 0.0088 -1.625 -0.15 0.1908 -0.125 0.4503 0.0521 -0.875 -0.1 0.4602 -1.6 -2.325 0.0100 -1.575 0.0548 -0.85 0.1977 0.0576 -0.825 0.2047 -0.075 0.4701 -0.05 0.4801 -2.3 0.0107 -1.55 0.0606 -0.8 0.2119 -2.275 0.0115 -1.525 0.0636 -0.775 0.2192 -0.025 0.4900 0.0000 0.5000 The Black-Scholes formula is C(S, K,T,t)=SN(d)- P{(T-t)KN(d- o(T-t)⁰.5), Where d=[(In (S/P+(T-t)K))/( ©(T-t)⁰.5)]+0.5 (T-t)⁰.5. Here is a normal distribution Normal Distribution Table N(X) X X N(X) N(X) X N(X) X -3 0.0013 -2.25 0.0122 -1.5 0.0668 -0.75 0.2266 -2.975 0.0015 -2.225 0.0130 -1.475 0.0701 -0.725 0.2342 -2.95 0.0016 -2.2 0.0139 -1.45 0.0735 -0.7 0.2420 -2.925 0.0017 -2.175 0.0148 -1.425 0.0771 -0.675 0.2498 -2.15 0.0158 -1.4 0.0808 -0.65 0.2578 -2.9 0.0019 -2.875 0.0020 -2.125 0.0168 -1.375 0.0846 -0.625 0.2660 -0.6 0.2743 -2.85 0.0022 -2.1 -2.825 0.0024 -2.075 0.0179 -1.35 0.0190 -1.325 0.0885 0.0926 -0.575 0.2826 -1.3 0.0968 -0.55 0.2912 -2.8 0.0026 -2.05 -2.775 0.0028 -2.025 0.0202 0.0214 -1.275 0.1012 -0.525 0.2998 -2.75 0.0030 -2 0.0228 0.1056 -0.5 0.3085 -1.25 -1.225 0.1103 -0.475 -2.725 0.0032 -1.975 0.0241 0.3174 -2.7 0.0035 -1.95 0.0256 -1.2 0.1151 -0.45 0.3264 -2.675 0.0037 -1.925 0.0271 -1.175 0.1200 -0.425 0.3354 -2.65 0.0040 -1.9 0.0287 -1.15 0.1251 -0.4 0.3446 -2.625 0.0043 -1.875 0.0304 -1.125 0.1303 -0.375 0.3538 -1.85 0.0322 -1.1 0.1357 -0.35 0.3632 -2.6 0.0047 -2.575 0.0050 -1.825 0.0340 -1.075 0.1412 -0.325 0.3726 -2.55 0.0054 -1.8 0.0359 -1.05 0.1469 -0.3 0.3821 -2.525 0.0058 -1.775 0.0379 -1.025 0.1527 -0.275 0.3917 -2.5 0.0062 -1.75 0.0401 -1 0.1587 -0.25 0.4013 -2.475 0.0067 -1.725 0.0423 -0.975 0.1648 -0.225 0.4110 0.4207 -2.45 0.0071 -1.7 0.0446 -0.95 0.1711 -0.2 -2.425 0.0077 -1.675 0.0470 -0.925 0.1775 -0.175 0.4305 0.0495 -0.9 0.1841 0.4404 -2.4 -2.375 -2.35 0.0094 0.0082 -1.65 0.0088 -1.625 -0.15 0.1908 -0.125 0.4503 0.0521 -0.875 -0.1 0.4602 -1.6 -2.325 0.0100 -1.575 0.0548 -0.85 0.1977 0.0576 -0.825 0.2047 -0.075 0.4701 -0.05 0.4801 -2.3 0.0107 -1.55 0.0606 -0.8 0.2119 -2.275 0.0115 -1.525 0.0636 -0.775 0.2192 -0.025 0.4900 0.0000 0.5000

Answer rating: 100% (QA)

Threeyear bond sells at interest rate of 45 325year bon... View the full answer