Using Treasury securities, design a trading strategy that makes a profit ifthe yield curve flattens, i.e., if y10 – Y2 decreases. You may use the followingapproximation:Y2,t = Levelt – 0.1SlopetY10,t = Levelt + 0.4Slope:where Levelț is the level factor of the yield curve and Slope is the slope factor (so,Level and Slope are the first two principal components). Design the trading strategysuch that it is immune to changes in the level of the yield curve. Further, size thetrades such that for every basis point decrease in the slope factor, the strategymakes $10,000. For the quantitative calculations, you may ignore transaction andfinancing costs. Furthermore, you may use the following information:2-year T-note10-year T-bondYield1.6%1.8%Modified duration1.969.11

In the realm of financial markets, the yield curve serves as a powerful indicator of economic…

Answered: Using Treasury securities, design a…

Using Treasury securities, design a trading strategy that makes a profit if the yield curve flattens, i.e., if y₁0 - Y₂ decreases. You may use the following approximation:

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Using Treasury securities, design a trading strategy that makes a profit if
the yield curve flattens, i.e., if y10 – Y2 decreases. You may use the following
approximation:
Y2,t = Levelt – 0.1Slopet
Y10,t = Levelt + 0.4Slope:
where Levelț is the level factor of the yield curve and Slope is the slope factor (so,
Level and Slope are the first two principal components). Design the trading strategy
such that it is immune to changes in the level of the yield curve. Further, size the
trades such that for every basis point decrease in the slope factor, the strategy
makes $10,000. For the quantitative calculations, you may ignore transaction and
financing costs. Furthermore, you may use the following information:
2-year T-note
10-year T-bond
Yield
1.6%
1.8%
Modified duration
1.96
9.11

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