Assignment:
Suppose that the 5-year rate is 6%, the seven year rate is 7% (both expressed with annual compounding), the daily volatility of a 5-year zero-coupon bond is 0.5%, and the daily volatility of a 7-year zero-coupon bond is 0.58%. The correlation between daily returns on the two bonds is 0.6. Map a cash flow of $1,000 received at time 6.5 years into a position in a five-year bond and a position in a seven-year bond. What cash flows in five and seven years are equivalent to the 6.5-year cash flow?