instruction in the file. Butterfly Trade Today is Monday, April 4, 2022. Conside

instruction in the file.
Butterfly Trade
Today is Monday, April 4, 2022.
Consider the following Treasury yield curve:
Maturity Coupon Price
2-year 3/31/2024 2.00% 100-00
6-year 9/30/2027 3.50% 100-00
11-year 9/15/2032 4.75% 100-00
There are 2 portfolios, each with $100MM market value.
Portfolio I: 6-year bullet.
Portfolio II: 2-year/11-year barbell.
1.) Today, you invest the $100MM in each portfolio, so that the portfolios
have the same duration. The trades settle tomorrow, Tuesday April 5, 2022.
a.) How much is invested in the 2-year and in the 11-year?
2.) Suppose you believe that 9 months from today the 2-year yield will be
50 basis points higher and the 11-year yield will be 25 basis points lower.
a.) Which strategy outperforms on a total rate of return basis?
3.) Discuss the issues/complexities involved with solving question #2.