Suggest the trade of purchasing a 10-year coupon bond and

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Reference no: EM13478500

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: EM13478500

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