Suppose there is a 1.5y STRIPS (i.e., no coupons) trading at $60 with the par value of
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- Suppose there is a 1.5y STRIPS (i.e., no coupons) trading at $60 with the par value of $100. Determine if there is an arbitrage opportunity. If so, what would be your arbitrage strategy?
- For every unit of the STRIP, how many units of Bond A, B, and C do you need to buy or short?
- What would be the price of the replicating portfolio?
Transcribed Image Text:
Maturity Bond (in half years) Annual Coupon Bond Price Spot Rate A 1 20% 101.85 8% B 2 20% 96.95 12% C 3 20% 87.70 16% Maturity Bond (in half years) Annual Coupon Bond Price Spot Rate A 1 20% 101.85 8% B 2 20% 96.95 12% C 3 20% 87.70 16%
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