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Currently, a 10-year bond is trading at $1,000. You are convinced that the 10-year bond will rally massively over the next 4-days. You currently have
Currently, a 10-year bond is trading at $1,000. You are convinced that the 10-year bond will rally massively over the next 4-days. You currently have $1M of cash. The 4-day repo rate is 2% (using actual/360 convention), and the haircut is 10%.
1. How can you make a maximized leveraged long position on the 10-year bond? Describe all the transactions at t = 0 and t = 4.
2. By what percent would the bond price have to decrease in order for you to lose all your $1M at t = 4?
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