Question
Consider three zero-coupon bonds of maturities 5, 10, and 25. A trader constructed a butterfly portfolio using the three bonds. Suppose the current yields are
Consider three zero-coupon bonds of maturities 5, 10, and 25. A trader constructed a butterfly portfolio using the three bonds. Suppose the current yields are flat at 5% and the market value of the bullet is 1 million.
(a) Determine the composition of the butterfly.
(b) If the yields go down by 50 bps, compute the price change of the butterfly.
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a Traders will buy 5 and 25 yr zero CBs and simultaneously sell 10 yr zero CB i...
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Contemporary Financial Management
Authors: R. Charles Moyer, James R. McGuigan, Ramesh P. Rao
13th edition
1285198840, 978-1285198842
