QUESTION 2:

a) A 90 day F.T. Bill due in 3 months (near contract) has a dy of 5% p.a. but a 90 day F.T. Bill due in 6 months (far contract) has a dy of 6% p.a. You think this difference will increase (implying a steeper yield curve). Explain what positions you would place today to profit from this expectation.

b) Calculate your profits (for a face value of $1 million for the F.T. Bill) if the near (far) F.T.B. subsequently have a dy of 3% (4.5%) respectively.

c) Repeat (b) for near (far) F.T.B. dy of 6% (7.4%) respectively.

d) Repeat (b) for near (far) F.T.B. of 3% (3.5%) respectively.