ARBITRAGE IN US GOVT

Topics: Bonds, Bond, 1921 Pages: 6 (916 words) Published: December 8, 2013
Arbitrage n Government Bond Market

Case Facts: Samantha Thompson, who analyzed and traded government bond for the firm of Mercer and Associates, seems to believe that she has found an arbitrage opportunity in U.S government bond market in 1991. U.S government bond market is the largest, most liquid, and closely watched fixed-income markets in the world and hence finding an arbitrage opportunity there was unlikely. Mercers were active in repo markets and occasionally participated in bond arbitrage on its account. Samantha. Samantha Thompson was interested in pricing of the 8 ¼ May 00-05, or the 8.25% coupon Treasury bond maturing May 15, 2005. She was interested in preparing synthetic bonds by combine these bonds with non-callable bonds maturing in 2005. Or a non-callable bond maturing in 2000 with STRIPS maturing in 2000.

Case Analysis:
As of December 1990, there were $527 billion of treasury bills with maturity of less than or equal to 1 year , $1265 billion of treasury notes with maturity of 2-10 years, and $388 billion of treasury bonds with maturities of more than 10 years or more. •Between the years 1946-91 the treasury failed to call the bond 14 out of 42 times.

Treasury Bonds
Callable 8.25 00-05
Ask: 101:04 = 101+4/32 = 101.125
Bid: 101.08 = 101 + 8/32 = 101.25
As of 12 May 05:
Ask: 129:29 = 129+29/32 = 129.90625
Bid: 129.23 = 129 + 23/32 = 129.71875
87/8 MAY 00
Ask: 104.16 = 104+16/32 = 104.5
Bid: 104.12 = 104 + 12/32 = 104.375

Treasury STRIPS
MAY 05
Ask: 30:10 = 30+10/32 = 30.3125
Bid: 29.29 = 29 + 29/32 = 29.90625
MAY 00
Ask: 46:21 = 46+21/32 = 46.65625
Bid: 46.08 = 46 + 08/32 = 46.25

On 8.25 May 05
Cost to buy at ASK= 0.6875*129.90625 + 0.3125*31.3125 = 89.31055 + 9.78516= 98.78 Cost to buy at BUY = 0.6875*129.71875 + 0.3125*29.90625 = 98.53

0n 8.25 May 00
Cost to buy at ASK= 0.6875*129.90625 + 0.3125*46.65625 = a. Cost to buy at BUY = 0.6875*129.71875 + 0.3125*29.90625 = 98.53

Arbitrage n Government Bond Market

Case Facts: Samantha Thompson, who analyzed and traded government bond for the firm of Mercer and Associates, seems to believe that she has found an arbitrage opportunity in U.S government bond market in 1991. U.S government bond market is the largest, most liquid, and closely watched fixed-income markets in the world and hence finding an arbitrage opportunity there was unlikely. Mercers were active in repo markets and occasionally participated in bond arbitrage on its account. Samantha. Samantha Thompson was interested in pricing of the 8 ¼ May 00-05, or the 8.25% coupon Treasury bond maturing May 15, 2005. She was interested in preparing synthetic bonds by combine these bonds with non-callable bonds maturing in 2005. Or a non-callable bond maturing in 2000 with STRIPS maturing in 2000.

Case Analysis:
As of December 1990, there were $527 billion of treasury bills with maturity of less than or equal to 1 year , $1265 billion of treasury notes with maturity of 2-10 years, and $388 billion of treasury bonds with maturities of more than 10 years or more. •Between the years 1946-91 the treasury failed to call the bond 14 out of 42 times.

Treasury Bonds
Callable 8.25 00-05
Ask: 101:04 = 101+4/32 = 101.125
Bid: 101.08 = 101 + 8/32 = 101.25
As of 12 May 05:
Ask: 129:29 = 129+29/32 = 129.90625
Bid: 129.23 = 129 + 23/32 = 129.71875
87/8 MAY 00
Ask: 104.16 = 104+16/32 = 104.5
Bid: 104.12 = 104 + 12/32 = 104.375

Treasury STRIPS
MAY 05
Ask: 30:10 = 30+10/32 = 30.3125
Bid: 29.29 = 29 + 29/32 = 29.90625
MAY 00
Ask: 46:21 = 46+21/32 = 46.65625
Bid: 46.08 = 46 + 08/32 = 46.25

On 8.25 May 05
Cost to buy at ASK= 0.6875*129.90625 + 0.3125*31.3125 = 89.31055 + 9.78516= 98.78 Cost to buy at BUY = 0.6875*129.71875 + 0.3125*29.90625 = 98.53

0n 8.25 May 00
Cost to buy at ASK= 0.6875*129.90625 + 0.3125*46.65625 = a. Cost to buy at BUY = 0.6875*129.71875 + 0.3125*29.90625 = 98.53

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