Perform exercise assuming a the trade is performed over

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Consider the trade of purchasing a 10-year coupon bond and hedge the interest rate risk using a 2-year zero coupon bond. Assume the term structure of interest rates is flat at the 4.5% continuously compounded interest rate. Compute the profits/losses from the strategy under various scenarios of interest rate variation, such as a positive or negative shift of 10 basis points, 1%, or 2%. Perform this exercise assuming (a) The trade is performed over tone day; (b) The trade is performed over one week; (c) The trade is performed over one month. How do the results change under these various scenarios? Discuss your results.

Reference no: EM13478808

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