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Currently, a 6-month T-bill yield is 7.19% and a 1-year STRIP yield is 8.67%. Further, you have strong reasons to believe that the 6-month spot
Currently, a 6-month T-bill yield is 7.19% and a 1-year STRIP yield is 8.67%. Further, you have strong reasons to believe that the 6-month spot rate in six months will be 4%.
Suppose that you can borrow up to $2,000,000 at the current market rates. All rates are on a semiannual bond equivalent basis.
How much profit will you expect to make if you use your whole line of credit and take advantage of an arbitrage opportunity (if any)?
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