Question
Funding Positions. As a junior trader at your investment bank you quickly and cost- 100+20 effectively need to fund overnight a $100m position in the
Funding Positions. As a junior trader at your investment bank you quickly and cost- 100+20 effectively need to fund overnight a $100m position in the on-the-run 5Y UST note. On Monday, March 16, 2009, this note, which pays a 3% coupon and matures on 02/15/13, is quoted at a bid-ask of 100 21/32 - 22/32.
excel with forumlas if possible
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(a) What should the invoice price of this note be? In your computation of accrued interest, please note that February is an odd month.
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(b) The general-collateral repo rate is 1.25% on 03/16/09. If the market required a 2% margin, how much of the purchase price could you have borrowed in the repo market, and how much interest would you have paid for a one-day loan? What would have been your equity stake in the position?
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(c) Can general repo rates ever become negative? Why or why not?
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(d) As an alternative, you consider an overnight loan in the fed funds market. What are fed funds rates and how do they relate to repo rates? Explain.
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(e) Optional. What are fails in the repo market? Describe two strategies to take advan- 20 tage of fails and explain to what purpose unscrupulous market participants could use them.
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