what's the trading strategy here

This case builds on the Fixed Income 2 Case by adding uncertain interest rates. During period 1 , the interest rate is known to be 7%. However, the interest rate during period 2 will either increase by 200 basis points 1 to 9% or decrease by 100 basis points to 6%. Tradable Securities, Endowments and Interest Rates There are three tradable securities in this case: two Treasury bills, one with a face value of $100 that expires in 6 months and another with a face value of $100 that expires in 1 year, and a Treasury bond with a 10% semi-annual coupon and face value of $100. The following table summarizes the payment schedule. Treasury bonds are quoted on the RIT system based on their clean prices 2 . When transacting a treasury bond, you will buy or sell the bond for the clean price (that is determined based on the bid/ask prices) plus the accrued interest. The transaction log will display two entries for every purchase or sale of a bond: the transaction amount (clean price * quantity), and the accrued interest amount. Traders begin the case with an endowment of $1,000,000 dollars and can buy long and short sell all securities. Traders will trade for 2 periods, each period lasting 5 minutes. These periods each represent 6 months of calendar time, for a combined total of one year. 1A basis point is a 1/100 th of a percentage. It is standard to refer to changes in interest rates by basis points due to the small changes that frequently occur. That is, "the yield on bonds increased by 4 basis points" instead of "... increased by 0.04% ". 2 A clean price is a bond term that refers to the price nat including accrued interest. The dirty price of a bond includes accrued interest. See case Fixed Income 2 for a description on calculating accrued interest The risk free rate is set to 7% per annum in the first period, then changes to 6% or 9% for the second 6-month period. Interest is compounded and paid weekly (every 12 seconds) on your cash balance at a rate of (1.071/521)100=0.1302% for period 1 , and (1.061/521)100=0.1121% or (1.091/521)100=0.1659% for period 2 . There is an equal probability of the rate in the second 6-month period being either 6% or 9% per annum. Security Information When period 2 commences, a news release will be posted informing traders of the new risk-free rate. The rate will either be 6% or 9% for the second 6-month period, with equal probability of either occurring. Liquidity Traders Liquidity traders marked as ANON in the order book actively trade the Treasury bills and bond by continuously submitting market and limit orders to cause price fluctuations. Liquidity trades normally distributed around the mid-market price, and have an equal probability of being a buy or a sell order. Trading Costs and maximum order size A commission of 2 cents per bond is charged on every transaction. There is a maximum order size of 1,000 bonds when submitting a single order. Settlement and Position Close-Out Any non-zero position in the Treasury bond or Treasury bill will result in payouts at the end of each period according to the schedule posted above. This case builds on the Fixed Income 2 Case by adding uncertain interest rates. During period 1 , the interest rate is known to be 7%. However, the interest rate during period 2 will either increase by 200 basis points 1 to 9% or decrease by 100 basis points to 6%. Tradable Securities, Endowments and Interest Rates There are three tradable securities in this case: two Treasury bills, one with a face value of $100 that expires in 6 months and another with a face value of $100 that expires in 1 year, and a Treasury bond with a 10% semi-annual coupon and face value of $100. The following table summarizes the payment schedule. Treasury bonds are quoted on the RIT system based on their clean prices 2 . When transacting a treasury bond, you will buy or sell the bond for the clean price (that is determined based on the bid/ask prices) plus the accrued interest. The transaction log will display two entries for every purchase or sale of a bond: the transaction amount (clean price * quantity), and the accrued interest amount. Traders begin the case with an endowment of $1,000,000 dollars and can buy long and short sell all securities. Traders will trade for 2 periods, each period lasting 5 minutes. These periods each represent 6 months of calendar time, for a combined total of one year. 1A basis point is a 1/100 th of a percentage. It is standard to refer to changes in interest rates by basis points due to the small changes that frequently occur. That is, "the yield on bonds increased by 4 basis points" instead of "... increased by 0.04% ". 2 A clean price is a bond term that refers to the price nat including accrued interest. The dirty price of a bond includes accrued interest. See case Fixed Income 2 for a description on calculating accrued interest The risk free rate is set to 7% per annum in the first period, then changes to 6% or 9% for the second 6-month period. Interest is compounded and paid weekly (every 12 seconds) on your cash balance at a rate of (1.071/521)100=0.1302% for period 1 , and (1.061/521)100=0.1121% or (1.091/521)100=0.1659% for period 2 . There is an equal probability of the rate in the second 6-month period being either 6% or 9% per annum. Security Information When period 2 commences, a news release will be posted informing traders of the new risk-free rate. The rate will either be 6% or 9% for the second 6-month period, with equal probability of either occurring. Liquidity Traders Liquidity traders marked as ANON in the order book actively trade the Treasury bills and bond by continuously submitting market and limit orders to cause price fluctuations. Liquidity trades normally distributed around the mid-market price, and have an equal probability of being a buy or a sell order. Trading Costs and maximum order size A commission of 2 cents per bond is charged on every transaction. There is a maximum order size of 1,000 bonds when submitting a single order. Settlement and Position Close-Out Any non-zero position in the Treasury bond or Treasury bill will result in payouts at the end of each period according to the schedule posted above