Question
Butterfly Trade It is April 7, 2021. Consider the following Treasury yield curve: Maturity Coupon Price 2-year 3/31/2023 2.00% 100-00 6-year 9/30/2026 3.50% 100-00 11-year
Butterfly Trade
It is April 7, 2021.
Consider the following Treasury yield curve:
Maturity Coupon Price
2-year 3/31/2023 2.00% 100-00
6-year 9/30/2026 3.50% 100-00
11-year 9/15/2031 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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