American University Rich Cheap Analysis and Treasury Arbitrage Questions

User Generated

nool33

Economics

American University

Question Description

I'm working on a finance question and need an explanation to help me study.

Using current UST security information from Bloomberg reproduced above answer the following question

Unformatted Attachment Preview

1. Rich-Cheap Analysis and Treasury Arbitrage. Working as a quantitative analyst for 100+20 a major Wall-Street firm, you are preparing your daily recommendation for relative value trades for your desk and their clients. As befits a junior analyst, you focus on the short end of the yield curve. Type Maturity Coupon Price Spot Yield Disc Factor Fwd Rate UST Bill 182D 99.9791 UST Note 1.0Y 99.9325 UST Note 1.5Y 0.125 99.9780 UST Note 2.0Y 1.125 96.3470 UST Note 2.5Y 2.875 99.4380 (a) Using current UST security information from Bloomberg reproduced above, you first extract the relevant spot rates and fill in the remainder of the table to verify the numbers desplayed by your trading system. Note that the maturities are exactly as stated, all securities are on-the-run, and the prices midpoint. You might want to provide the requisite formulae indicating your exact calculations to convince your boss that your analysis can be trusted. (b) Next, you analyze a selection of UST notes to detect any mispricing and possible relative- value trades. From Bloomberg, you identify the following promising candidates on March 15, 2021: Type Maturity Coupon Actual Price YTM Fair Price Fair YTM USN 03/15/22 2.375 102-09 0.072949 USN 09/15/22 1.500 102-02 0.100885 USN 03/15/23 0.500 100-20 0.148887 USN 03/31/23 2.500 104-23 0.136480 USN 09/15/23 0.125 99-22 0.142610 (c) Carry out the requisite rich-cheap analysis to propose relative value trades. (d) The FRB has announced in December 2020 that it will support the economy with an unprecedentedly lax monetary policy as long as necessary because of the pandemic and the resulting economic fallout. However, recently the yield curve has become very steep. What are the dangers of the Fed's current policy stance and what does the market seem to expect? Explain. (e) Optional. Research the current yield curve as of the date of the exam and compare it to the one at the beginning of the year. What do you see? Download the data (e.g., from Bloomberg or www.treasury.gov), generate the requisite charts, and explain. 20 1. Rich-Cheap Analysis and Treasury Arbitrage. Working as a quantitative analyst for 100+20 a major Wall-Street firm, you are preparing your daily recommendation for relative value trades for your desk and their clients. As befits a junior analyst, you focus on the short end of the yield curve. Type Maturity Coupon Price Spot Yield Disc Factor Fwd Rate UST Bill 182D 99.9791 UST Note 1.0Y 99.9325 UST Note 1.5Y 0.125 99.9780 UST Note 2.0Y 1.125 96.3470 UST Note 2.5Y 2.875 99.4380 (a) Using current UST security information from Bloomberg reproduced above, you first extract the relevant spot rates and fill in the remainder of the table to verify the numbers desplayed by your trading system. Note that the maturities are exactly as stated, all securities are on-the-run, and the prices midpoint. You might want to provide the requisite formulae indicating your exact calculations to convince your boss that your analysis can be trusted. (b) Next, you analyze a selection of UST notes to detect any mispricing and possible relative- value trades. From Bloomberg, you identify the following promising candidates on March 15, 2021: Type Maturity Coupon Actual Price YTM Fair Price Fair YTM USN 03/15/22 2.375 102-09 0.072949 USN 09/15/22 1.500 102-02 0.100885 USN 03/15/23 0.500 100-20 0.148887 USN 03/31/23 2.500 104-23 0.136480 USN 09/15/23 0.125 99-22 0.142610 (c) Carry out the requisite rich-cheap analysis to propose relative value trades. (d) The FRB has announced in December 2020 that it will support the economy with an unprecedentedly lax monetary policy as long as necessary because of the pandemic and the resulting economic fallout. However, recently the yield curve has become very steep. What are the dangers of the Fed's current policy stance and what does the market seem to expect? Explain. (e) Optional. Research the current yield curve as of the date of the exam and compare it to the one at the beginning of the year. What do you see? Download the data (e.g., from Bloomberg or www.treasury.gov), generate the requisite charts, and explain. 20
Purchase answer to see full attachment
Student has agreed that all tutoring, explanations, and answers provided by the tutor will be used to help in the learning process and in accordance with Studypool's honor code & terms of service.

Explanation & Answer

Attached. Please let me know if you have any questions or need revisions.

Type
UST Bill
UST Note
UST Note
UST Note
UST Note

Maturity
182D
1.0Y
1.5Y
2.0Y
2.5Y

Coupon

0.125
1.125
2.875

Price
99.9791
99.9325
99.978
99.347
99.438

0.0625 0.06248694
0.0625 0.06245781
0.0625 0.06236918
0.5625 0.56238244
0.5625 0.56212031
0.5625 0.56132261
0.5625
1.4375
1.4375
1.4375
1.4375
1.4375

1.43719956
1.43701476
1.43649634
1.42701758
1.41486928

Spot Yield
0.0418%
0.07%
0.140%
1.475%
3.225%

Disc Factor
0.99990
0.99933
0.99791
0.95127
0.92433

Forward Rate
0.000932847
0.002844247
0.0558646...

Whyborfb (12816)
Rice University

Anonymous
Nice! Really impressed with the quality.

Studypool
4.7
Indeed
4.5
Sitejabber
4.4

Related Tags