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What Could You Do If B' Were Trading at 115 ? What Could You Do If B' Were Trading at 114 ?

This document contains a table of prices for various government securities labeled A through E over 6 time periods. It also includes zero coupon bonds labeled d1 through d5 and a security labeled B' with prices of 12 and 112. The document asks if B' could be replicated using a portfolio of securities A and B, and calculates the weights of a and b that would replicate B'. It also includes discount factors and rates for different maturities. Finally, it asks what could be done if B' was trading at 115 or 114.

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35 views4 pages

What Could You Do If B' Were Trading at 115 ? What Could You Do If B' Were Trading at 114 ?

This document contains a table of prices for various government securities labeled A through E over 6 time periods. It also includes zero coupon bonds labeled d1 through d5 and a security labeled B' with prices of 12 and 112. The document asks if B' could be replicated using a portfolio of securities A and B, and calculates the weights of a and b that would replicate B'. It also includes discount factors and rates for different maturities. Finally, it asks what could be done if B' was trading at 115 or 114.

Uploaded by

zennmas
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
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all govt securities

0 1 2 3 4 5
A 100.91 105.25 0.00 0.00 0.00 0.00
B 103.02 6.00 106.00 0.00 0.00 0.00
C 107.54 7.50 7.50 107.50 0.00 0.00
D 101.18 5.25 5.25 5.25 105.25 0.00
E 112.72 8.00 8.00 8.00 8.00 108.00
zero coupon d1 ? 1.00 0.00 0.00 0.00 0.00
d2 ? 0.00 1.00 0.00 0.00 0.00
d3 ? 0.00 0.00 1.00 0.00 0.00
d4 ? 0.00 0.00 0.00 1.00 0.00
d5 ? 0.00 0.00 0.00 0.00 1.00

B' 114.28 12.00 112.00

—What could you do if B’ were tra


—What could you do if B’ were tra

Can you “replicate” B’ using B and A


B' 12.00 112.00 replication involv
A 105.25 0.00 a*A + b*B such th
B' 6.00 106.00

a 0.05
b 1.06 b 1.06
a 0.05

105.25 6
0 106
maturity discount factor rate
1 0.9588 4.30%
2 0.9176 4.39%
3 0.8695 4.77%
4 0.8244 4.95%
5 0.7792 5.12%
0.958765
0.917617
0.869462
0.824364 97.2674109264
0.779244 0.9176170842

pricing kernel

if B’ were trading at 115 ?


if B’ were trading at 114 ?

sing B and A ?
cation involves finding a portfolio
+ b*B such that I get payoffs of B'

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