Butterfly Trade It is November 30, 2017. Consider the following Treasury yield curve:
Maturity YTM Price
2-year 11/30/2019 2.00% 100-00
5-year 10/15/2022 3.50% 100-00
10-year 2/28/2027 4.75% 100-00
There are 2 portfolios, each with $100 Million market value. Portfolio I: 5-year bullet. Portfolio II: 2-year/10-year barbell.
1) Today, you invest the $100 Million in each portfolio, so that the portfolios have the same duration. The trades settle tomorrow. How much is invested in the 2-year and in the 10-year?
2) Suppose you believe that 9 months from today the 2-year yield will be 50 basis points higher and the 10-year yield will be 25 basis points lower.
a) Which strategy do you think will outperform on a total rate of return basis? What does your answer depend on? b.) Based on your answer to part a.), create a scenario for the 5-year that validates your opinion above. c.) Based on your answer to b.), calculate the total return for each strategy.
No interest rates are given for this problem. Have to start with calculating duration of the 5 year bullet