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Draw a picture of the initial transactions in the repo trade

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Because you believe that the zero-curve will shift upward and decrease the bond price, you decide to use a reverse repo trade to short the bond. Let's suppose that a repo dealer quotes you a special repo rate of 2% and you borrow 100 units of the Treasury bond (which you then sell on the market as part of your reverse repo transaction).

(a) Draw a picture of the initial transactions in the repo trade.

(b) If the zero-curve shifts up by one percentage point, what is the value of the Treasury bond in part 1?

(c) What is your net payo_ to unwinding the repo trade tomorrow? Recall that you need to buy the bond and sell it to the repo dealer at the prespeci_ed price.

Reference no: EM132780859

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