Question
Butterfly Trade It is November 15, 2018. Consider the following Treasury yield curve: Maturity YTM Price 2-year 10/31/20 2.00% 100-00 5-year 10/31/23 3.50% 100-00 10-year
Butterfly Trade It is November 15, 2018.
Consider the following Treasury yield curve:
Maturity YTM Price
2-year 10/31/20 2.00% 100-00
5-year 10/31/23 3.50% 100-00
10-year 10/15/28 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.
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 these questions.
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