Price of a replicating portfolio


Problem:

On February 18, 2008, a two-year Treasury STRIP (default free, zero-coupon note) sold for $98.5678 per hundred dollar of par value, while a four-year Treasury STRIP sold for $97.1264 per hundred dollar of par value. Assuming financial markets are perfect, you want to own $22M face value of 2-year Treasury STRIPs in two years and only pay the same price as the February 18, 2008 price.

1. Without using any derivatives, design a strategy to achieve this goal.

2. Suppose that the 2-year forward price for a two-year STRIP was $97.2378 per hundred dollar of par on February 18. What should have been the price of a replicating portfolio of a long forward contract position?

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