Question 11 Consider a hedge fund that has initiated a yield-curve flattening strategy using the 10-year and 2-year points on the yield curve. The fund has taken two 100 million positions in the 10-year and 2-year zero-coupon Euro area government bonds. Both bonds have a par value of 100. Assume the coupon payment frequency is annual. Calculate the 1-year investment return for this strategy, in both per cent change and monetary value terms, using the spot rates in Table 1. Explain your answer and comment on the change in the shape of the spot rate curve. Table 1. Euro area spot rates at start date and one-year later. Maturity Spot rates Spot rates Start date One-year later 1 0.25% 0.25% N 0.50% 0.50% 3 1.50% 0.75% 4 2.00% 1.00% 5 2.25% 1.25% 6 2.50% 1.50% 7 2.75% 1.75% 00 3.00% 2.00% 9 3.25% 2.25% 10 2.50% 3.50% + to+