Citibank has developed a way of creating a zero-coupon bond, called a strip, from the coupon-bearing Treasury bond by selling each of the cash flows underlying the coupon-bearing bond as a separate security. You as a treasurer working for Citibank, have a relatively simple trading strategy. You would buy strips and sell them in the forward market. Suppose for example, that the 3-month interest rate is 4% per annum and the spot price of a strip is $70. Q1)What will be the 3-month forward price? Q2)Assuming that the actual forward price is 72, formulate an arbitrage strategy.

Essentials Of Investments
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ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
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Chapter1: Investments: Background And Issues
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Citibank has developed a way of creating a zero-coupon bond, called a strip, from the coupon-bearing Treasury bond by selling each of the cash flows underlying the coupon-bearing bond as a separate security. You as a treasurer working for Citibank, have a relatively simple trading strategy. You would buy strips and sell them in the forward market. Suppose for example, that the 3-month interest rate is 4% per annum and the spot price of a strip is $70.

Q1)What will be the 3-month forward price?

Q2)Assuming that the actual forward price is 72, formulate an arbitrage strategy.

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