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5. A trader is reviewing the following market prices for possible arbitrage opportunity between a US Treasury Bond and US Treasury STRIP where there is
5. A trader is reviewing the following market prices for possible arbitrage opportunity between a US Treasury Bond and US Treasury STRIP where there is an active trading STRIP and Bond market. On 1/2/2018 (.e. 2nd Jan 2018), a US Treasury Bond with a 6%pa coupon maturing on 8/15/2019 (i.e. 15th August 2019) was quoting Bid price (104.6094) and Ask price (104.6719) in clean price on a semiannual basis. (Note. There are 141 days from 1/2/2018 to the PREVIOUS coupon day (8/15/2017) and market trades on dirty price. Day count convention is 30/360) At the same time, the STRIP market has the following quoted prices on the relevant STRIPS: Maturity Ask 2/15/18 99.6563 99.6875 99.1875 8/15/18 98.1719 2/15/19 96.8281 96.8125 95.2656 8/15/19 99.2969 (Hint: Clean = Dirty Price in STRIP market since it is zero coupon) Explain and provide details of the trader's analysis to evaluate if arbitrage exists. (10 marks)
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