Solve the given problem
t , r
0.5 , 0.03
1 , 0.04
1.5 ,0.05
2 , 0.06
Because you believe that the zero-curve will shift downward and increase the bond prices, you decide to use a repo trade to buy the bond. Let's suppose that a repo dealer quotes you a repo rate of 8% and you trade 100 units of the Treasury bond.
(a) Draw a picture of the initial transactions in the repo trade.
(b) If the zero-curve shifts down by one percentage point, what is the value of the Treasury bond in part 1?
c) What is your net payo to unwinding the repo trade tomorrow? Assume that the price tomorrow is the price that you calculated in (b).