Explain how you would hedge a short position in a 5-year zero-coupon bond using a portfolio of 1-year zeros and 10-year zeros if the yield curve is normal as shown below. Would you experience gains or losses from this hedging strategy if the yield curve twists as shown below? Maturity (years) Spot rates (Normal yield curve) Spot rates (Twisted yield curve) 1 4% 6% 5 5% 5% 10 6% 4%
Explain how you would hedge a short position in a 5-year zero-coupon bond using a portfolio of 1-year zeros and 10-year zeros if the yield curve is normal as shown below. Would you experience gains or losses from this hedging strategy if the yield curve twists as shown below? Maturity (years) Spot rates (Normal yield curve) Spot rates (Twisted yield curve) 1 4% 6% 5 5% 5% 10 6% 4%
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Transcribed Image Text:Explain how you would hedge a short position in a 5-year zero-coupon bond
using a portfolio of 1-year zeros and 10-year zeros if the yield curve is normal
as shown below. Would you experience gains or losses from this hedging
strategy if the yield curve twists as shown below?
Maturity (years)
Spot rates (Normal yield curve)
Spot rates (Twisted yield curve)
1
4%
6%
5
5%
5%
10
6%
4%
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