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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.
- 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.
- 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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