Business, 25.04.2020 00:29 maya4321

You are a market maker in treasury bonds and notes. A customer just sold you $10,000,000 in face value of STRIPS that matures in exactly 17 years. The current yield to maturity on these STRIPS is an effective annual yield of 4%. You know that it will take some time to find a buyer for this bond, so you want to hedge your exposure to changes in the 17-year yield by trading the more liquid 10-year and 30-year STRIPS. The current effective annual yields to maturity are 3% for the 10-year STRIPS and 4.5% for the 30-year STRIPS.

a. Calculate the DV01s for all three STRIPS. When calculating the values of DV01, consider a one basis point change in the effective annual yields.

b. What position in the 10-year STRIPS will hedge your position in the 17-year STRIPS?

c. What posit ion in the 30- year STRIPS will hedge your position in the 17-year STRIPS?

d. How can you decide if you are better hedged with the 10-year STRIPS or the 30-year STRIPS? No calculations are required.

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You are a market maker in treasury bonds and notes. A customer just sold you $10,000,000 in face val...

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