Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Q5: Futures There are three parts in this question, you are expected to answer all of them. Part (a). A 6% coupon 10-year bond with
Q5: Futures
There are three parts in this question, you are expected to answer all of them. Part (a). A 6% coupon 10-year bond with a par value 100 is selling at par and is deliverable against a futures contract that settles in 4 months. The current repo rate is 4% p.a. Assume the futures price is currently 100. Identify an arbitrage opportunity as in the above scenario and demonstrate how to implement a strategy to make profits from the arbitrage opportunity. (3 marks) Part (b). Calculate the no-arbitrage price of the futures contract. (1 mark) Part (c). You are a bond portfolio manager and implement a strategy to earn active returns by betting on the changes of interest rate. You expect the interest rate to decline after the next RBA board meeting. Describe what futures position you need to take in order to adjust the duration of your portfolio. (1 mark) There are three parts in this question, you are expected to answer all of them. Part (a). A 6% coupon 10-year bond with a par value 100 is selling at par and is deliverable against a futures contract that settles in 4 months. The current repo rate is 4% p.a. Assume the futures price is currently 100. Identify an arbitrage opportunity as in the above scenario and demonstrate how to implement a strategy to make profits from the arbitrage opportunity. (3 marks) Part (b). Calculate the no-arbitrage price of the futures contract. (1 mark) Part (c). You are a bond portfolio manager and implement a strategy to earn active returns by betting on the changes of interest rate. You expect the interest rate to decline after the next RBA board meeting. Describe what futures position you need to take in order to adjust the duration of your portfolio. (1 mark) Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started