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In the bond market, available securities are provided as follows: Maturity (years) Position name YTM (%) Coupon (%) 2 Short-wing 4.5 5 5 Body 5.5

In the bond market, available securities are provided as follows:

Maturity (years)

Position name

YTM (%)

Coupon (%)

2

Short-wing

4.5

5

5

Body

5.5

5

10

Long-wing

6

5

Now, consider the following strategy

Maturity (years)

Quantity (in USD Face Value)

2

X1

5

-10,000

10

X2

In other words, the strategy purchases $ X1-par 2-year bond and $ X2-par 10-year bond, while it sells short $10,000-par 5-year bond.

  1. This strategy is a zero-cost strategy (i.e., long and short positions are exactly offset). Moreover, this strategy is immune to interest rate risk. Determine X1 and X2 of this strategy.

  1. Do you think this strategy will make a profit after a year from now (2022~2023)? Provide a reasonable scenario based on the real market situation nowadays, and evaluate the performance of the strategy.

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