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You are a manager of Short Term Capital Management (STCM). You observe that the interest rate on 7 year notes is 5.4 percent, while the interest rate 7.25 year notes is 5.25 percent. You know for sure for sure that the two interest rates will converge in six months to some value X. You also have the ability to go short $500 million face in any note you choose. Given all this, describe your profit making arbitrage strategy. Then graph the amount of money you will make if the interest rate converges to X, X a percentage rate percentage between 3 and 8. Please make sure you don’t have negative returns.

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Financial Management, Finance

Category:- Financial Management
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