Fixed Income Arbitrage is to find mispricing of treasury coupon bonds through system of linear equations where w of equations ># of unknowns. Suppose there are only 3 treasury coupon bonds on the market today: Bond A: 2-year 2% treasury coupon bond, trading at $937.0 Bond B: 2-year 3% treasury coupon bond, trading at $955.5 Bond C: 2-year 4.5% treasury coupon bond, trading at $974.0 All 3 treasury coupon bonds pay annual coupon. Let Po1 and Poa be the two unknowns, where Po denotes the price today of a 1-year STRIPS, and Pea the price today of a 2-year STRIPS. Face value of STRIPS is $1. 1) Since each coupon bond is essentially a package of STRIPS, write the 3-equation 2-unknown system. 2) Usually how many pairs of solutions can you solve for the system in (1)? 3) Focusing on ONLY Bond A and Bond B, will this 2-equation 2-unknown system have solutions? Solve them 4) Suppose your solution in (3) are indeed the STRIPS prices today, what can you say about arbitrage profit in of three coupon bonds, in which one(s), how much? In your brokerage account, you decide to sell short 200 shares of Facebook stock, whose current price account has initial margin requirement of 55%, and maintenance margin requirement of 35%. 1) Initially, you put in some cash to just meet the initial margin requirement, what's the amount you 2) One week later, FB stock price goes up 20%. Show that you are indeed getting a margin call. 3) You take no action on the margin call, then what will the broker do? Round your answer to integ 7. shares. Set up a balance-sheet chart each for 1), 2) and 3) to assist your answers. Treasury ult risk where Is linted to Suppose CAPM holds true for the following two stocks, of which you collect the historical re Standard deviation of re Average (expected) monthly return Security 2.0% GOOG he ma ndefinit arket pric ut use CA stock is ut usually Fixed Income Arbitrage is to find mispricing of treasury coupon bonds through system of linear equations where w of equations ># of unknowns. Suppose there are only 3 treasury coupon bonds on the market today: Bond A: 2-year 2% treasury coupon bond, trading at $937.0 Bond B: 2-year 3% treasury coupon bond, trading at $955.5 Bond C: 2-year 4.5% treasury coupon bond, trading at $974.0 All 3 treasury coupon bonds pay annual coupon. Let Po1 and Poa be the two unknowns, where Po denotes the price today of a 1-year STRIPS, and Pea the price today of a 2-year STRIPS. Face value of STRIPS is $1. 1) Since each coupon bond is essentially a package of STRIPS, write the 3-equation 2-unknown system. 2) Usually how many pairs of solutions can you solve for the system in (1)? 3) Focusing on ONLY Bond A and Bond B, will this 2-equation 2-unknown system have solutions? Solve them 4) Suppose your solution in (3) are indeed the STRIPS prices today, what can you say about arbitrage profit in of three coupon bonds, in which one(s), how much? In your brokerage account, you decide to sell short 200 shares of Facebook stock, whose current price account has initial margin requirement of 55%, and maintenance margin requirement of 35%. 1) Initially, you put in some cash to just meet the initial margin requirement, what's the amount you 2) One week later, FB stock price goes up 20%. Show that you are indeed getting a margin call. 3) You take no action on the margin call, then what will the broker do? Round your answer to integ 7. shares. Set up a balance-sheet chart each for 1), 2) and 3) to assist your answers. Treasury ult risk where Is linted to Suppose CAPM holds true for the following two stocks, of which you collect the historical re Standard deviation of re Average (expected) monthly return Security 2.0% GOOG he ma ndefinit arket pric ut use CA stock is ut usually
