Please look at the instruction on attachment EFN517: Fixed Income and Alternati

Please look at the instruction on attachment
EFN517: Fixed Income and Alternative Investments
Semester 1, 2022
Assignment
The Assignment is due by 11:59PM May 27, 2022
Total Points: 30
Assignment Instructions
Please submit your assignment through the “Assessments” section on Blackboard. Please submit two
files:
1) An Excel Worksheet that includes data, computations, and graphs.
– You will need to upload your excel spreadsheet containing all of your calculations
– No specific format required. Just make it clear what you are doing in each section, e.g.
Duration for Bond XYZ.
Please name the file as follows: YourLastName_YourFirstName_Data.xlsx
2) A Word (or PDF) file with your written answers and comments. Please focus on the key
comments (of your analysis performed in the Excel file) and on the answers to the questions.
The file must include a total of max 6 pages. The document may contain key tables and charts
from your Excel Worksheet. Please report all the sources and other relevant information.
Structure of report:
– Discuss your view on Interest rates – include references to any websites, articles etc.
– Discuss the current portfolio, including an explanation of the required calculations.
– Explain how do you want to change the (duration of the) current portfolio (link to your view
on rates)
– Describe how you will use futures to change duration, including an explanation of required
calculations.
– Describe what risks you face from your strategies.
– Note: When writing your report, refer to where in the spreadsheet each calculation/data
is located (Tab name, cell numbers, etc…)
Please name the file as follows: YourLastName_YourFirstName_Report.docx (.pdf)
The assignment will be marked online and results released within two weeks of the submission date.
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Assignment
A. View on Interest rates
Read up on the outlook for Australian Interest Rates 1-2 years ahead. Useful sources are the RBA,
Treasury and the big retail banks, among others. Write a small paragraph explaining the outlook for
interest rates and the factors influencing the outlook. Outline what is your view on future interest rates.
Your view on future interest rate movements will inform the decision you will make for your bond
portfolio.
B. Bond Portfolio Construction
You are working for a bond portfolio manager. Your portfolio consists of the following Australian
Commonwealth Government Securities (CGS):
 10yr semi-annual coupon paying bond with a coupon rate of 3% p.a and a YTM of 3.14%.
(Hold 3 of these bonds)
 5yr semi-annual coupon paying bond with a coupon rate of 2.5% p.a and a YTM of 2.93%.
(Hold 5 of these bonds)
 3yr semi-annual coupon paying bond with a coupon rate of 2.0% p.a and a YTM of 2.73%.
(Hold 3 of these bonds)
Each of the three types of bonds have a face value of $100,000
Compute the duration and convexity of each bond.
Compute the actual and approximated (using duration and duration+convexity) value of each bond
assuming a parallel shift upwards and downwards of the yield curve of 50 b.p.
Compute the duration of your bond portfolio.
C. Bond Portfolio Management Problem
Given your view on interest rates, would you increase or decrease the duration of your portfolio? What
would be your target duration?
You have limits of the duration of your portfolio. The duration of your bond portfolio must be
between 3 and 7 years.
Once you have identified your target duration, outline how it would be possible to get close to it by
trading (buying or selling) some of the bonds of your portfolio or by trading CGS Bond futures.
Provide an explanation of both strategies.
The features of the futures contracts are as follows (expiration: June 2022):
10 year contract: $100,000 Face Value, 6%p.a. semi-annual coupon and quoted YTM of 3.15%p.a.
5 year contract: $100,000 Face Value, 2%p.a. semi-annual coupon and quoted YTM of 3.03%p.a.
3 year contract: $100,000 Face Value, 6%p.a. semi-annual coupon and quoted YTM of 2.89%p.a.
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Outline a strategy using one or more of these contracts to achieve the desired duration position for
your portfolio. You will need to find an approximate dollar value of exposure you need to buy or sell
in the futures to achieve your desired duration.
Describe the characteristics and potential risks you face from both strategies.
Useful links
Using Futures for adjusting Duration: https://www.cmegroup.com/trading/interest-
rates/files/Treasury_Duration_Strategy_Paper.pdf
3-, 5- and 10-year CGS Bond futures are available to trade via the ASX
(https://www2.asx.com.au/markets/trade-our-derivatives-market/overview/interest-rate-
derivatives/bond-derivatives)
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