Butterfly Trade It is April 1, 2020. Consider the following Treasury yield curve: Maturity Coupon Price 2-year
Question:
Butterfly Trade It is April 1, 2020. Consider the following Treasury yield curve: Maturity Coupon Price 2-year 31-03-2022 2.00% 100-00 5-year 30-09-2025 3.50% 100-00 10-year 15-09-2030 4.75% 100-00 There are 2 portfolios, each with $100MM market value. Portfolio I:5-year bullet. Portfolio II: 2-year/10-year barbell. 1.) Today, you invest the $100MM in each portfolio, so that the portfolios have the same duration.The trades settle tomorrow, April 2. a.)How much is invested in the 2-year and in the 10-year? 2.)Suppose you believe that 9 months from today the 2-year yield will be 50 basis points higher and the 10-year yield will be 25 basis points lower. a.) Which strategy outperforms on a total rate of return basis? 3.) Discuss the issues/complexities involved with solving question #2. All your answers must be typed and .