Question 2 Suppose a Barbell Butterfly is constructed as follows at t=0 Asset Liability 1 unit...
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Question 2 Suppose a Barbell Butterfly is constructed as follows at t=0 Asset Liability 1 unit of 16 year zero 0.5 units of 2-year zero 0.5 units of 30-year zero Using the 8 percent yield curve, the following values are calculated: Market price of 2 year zero at t=0 is 10,000 Market price of 30 year zero at t=0 is 10,000 Market price of 16 year zero at t=0 is 10,000 Net Equity value at t=0 is 0 At the 8 percent yield curve level The duration convexity and theta of assets, liabilities and net equity are as follows: Asset Duration 1600 Convexity 452 Theta 889 Liability 1600 256 1068 Net Equity 0 196 -179 a. Sketch the performance profiles of assets and liabilities on the same graph as of t=0. Clearly label the axes and curves on this graph. Show on the graphs clearly and correctly all relevant values, such as delta, gamma and market values, Provide a short interpretation of the graph. (Hint: Sketch means that suppose you are in an interview and the interviewer gives you this question, paper, and a pen. You are asked to draw on paper by hand what the performance profiles would look like. You do not need to use a spreadsheet). b. Sketch the performance profile of net equity as of t-0. Clearly label the axes and curves on this graph. Provide a short interpretation of the graph. c. Sketch the performance profiles of assets and liabilities on the same graph as of t=1. Clearly label the axes and curves on this graph. Provide a short interpretation of the graph. d. Sketch the performance profile of net equity as of t=0 and t=1 on the same graph. Clearly label the axes and curves on this graph. Provide a short interpretation of the graph. e. Your answers to parts (a) through (d) must have highlighted a problem with the delta hedging strategy. State this problem and propose an alternative hedging strategy that will eliminate the problem you identified in parts (a) through (d). Question 2 Suppose a Barbell Butterfly is constructed as follows at t=0 Asset Liability 1 unit of 16 year zero 0.5 units of 2-year zero 0.5 units of 30-year zero Using the 8 percent yield curve, the following values are calculated: Market price of 2 year zero at t=0 is 10,000 Market price of 30 year zero at t=0 is 10,000 Market price of 16 year zero at t=0 is 10,000 Net Equity value at t=0 is 0 At the 8 percent yield curve level The duration convexity and theta of assets, liabilities and net equity are as follows: Asset Duration 1600 Convexity 452 Theta 889 Liability 1600 256 1068 Net Equity 0 196 -179 a. Sketch the performance profiles of assets and liabilities on the same graph as of t=0. Clearly label the axes and curves on this graph. Show on the graphs clearly and correctly all relevant values, such as delta, gamma and market values, Provide a short interpretation of the graph. (Hint: Sketch means that suppose you are in an interview and the interviewer gives you this question, paper, and a pen. You are asked to draw on paper by hand what the performance profiles would look like. You do not need to use a spreadsheet). b. Sketch the performance profile of net equity as of t-0. Clearly label the axes and curves on this graph. Provide a short interpretation of the graph. c. Sketch the performance profiles of assets and liabilities on the same graph as of t=1. Clearly label the axes and curves on this graph. Provide a short interpretation of the graph. d. Sketch the performance profile of net equity as of t=0 and t=1 on the same graph. Clearly label the axes and curves on this graph. Provide a short interpretation of the graph. e. Your answers to parts (a) through (d) must have highlighted a problem with the delta hedging strategy. State this problem and propose an alternative hedging strategy that will eliminate the problem you identified in parts (a) through (d).
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a Sketching the performance profiles of assets and liabilities at t0 Sketch the following graph xaxis Yield Curve Level yaxis Market Value Asset Perfo... View the full answer
Related Book For
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
Posted Date:
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