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Butterfly Trade It is April 7, 2021. Consider the following Treasury yield curve: Maturity Coupon Price 2-year 2023/3/31 2.00% 100-00 6-year 2026/9/30 3.50% 100-00 11-year
Butterfly Trade | ||||||
It is April 7, 2021. | ||||||
Consider the following Treasury yield curve: | ||||||
Maturity | Coupon | Price | ||||
2-year | 2023/3/31 | 2.00% | 100-00 | |||
6-year | 2026/9/30 | 3.50% | 100-00 | |||
11-year | 2031/9/15 | 4.75% | 100-00 | |||
There are 2 portfolios, each with $100MM market value. | ||||||
Portfolio I: 6-year bullet. | ||||||
Portfolio II: 2-year/11-year barbell. | ||||||
1.) Today, you invest the $100MM in each portfolio, so that the portfolios | ||||||
have the same duration. The trades settle tomorrow, April 8. | ||||||
a.) How much is invested in the 2-year and in the 11-year? | ||||||
2.) Suppose you believe that 9 months from today the 2-year yield will be | ||||||
50 basis points higher and the 11-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. | ||||||
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