Which instrument do you want to be short and long

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Suppose the current one-month futures price for a 2-year U.S. Treasury note is 99.77 (percent of par) with a yield of about 1% and the current one-month futures price for a 10-year U.S. Treasury note is 95.17 with a yield of about 3.7%. The 2-year note underlying the futures contract (the cheapest-to-deliver) has a coupon of 1% and pays interest semi-annually. The 10-year note underlying the futures contract has a coupon payment of 3.125 paid semi-annually. You are convinced that the yield curve will continue to steepen over the next one month horizon, so that the difference in yields between the 2-year and the 10-year will be three full percentage points in one month. What futures spread trade do you want to execute (i.e. which instrument do you want to be short and which instrument do you want to be long)? Demonstrate that the trade works (i.e., you make money) if your expectations about interest rates is correct.

Reference no: EM13732297

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