NO.PZ2023032703000095
问题如下：
The conversation next turns to the state
of the economy. Another member of Thorn’s team, David Yung, concludes that the
economy will weaken, causing the yield curve to experience a downward parallel
shift. Yung proposes two trades.
l Trade 1: Sell a 5-year A-rated callable
corporate bond, Buy a 5-year A-rated non-callable bond of the same issuer
l Trade 2: Sell a 10-year fixed-rate
corporate bond, Buy a 10-year floating-rate bond of the same issuer
Determine, given Yung’s conclusions,
whether each of his proposed trades would most likely be profitable. Justify
each response.
选项：
解释：
Correct Answer:
Trade 1 should be executed. Interest rates decline when the economy weakens. Due to negative convexity, callable bonds underperform non-callable bonds during periods of declining interest rates. Callable bonds have a price limit imposed by the call price. Consequently, the bond would most likely be called when rates decline. The trade will, therefore, be profitable.
Trade 2 should not be executed. Given Yung’s economic outlook and anticipation of a parallel downward shift in the yield curve, duration should be increased, not decreased. Fixed-rate bonds have higher duration than floating-rate bonds as coupons are fixed rather than adjusting periodically to market interest rates. Selling higher-duration bonds to invest in lower-duration bonds as rates decline would not be appropriate.
yield curve is expected to experience a downward parallel shift, thus rates go down, Yung should consider to increase duration trade.
Trade 2: sell 10 year fixed rate corporate bond will reduce duration, and buy a 10 year floating rate bond is also a short duration trade. Thus trade 2 will not be profitable.
Trade 1 will be prefitbale, as buy a 5 year fixed bond will increase duration. while sell a 5 year callable bond is a long volatility and long duration trade, thus will increase duration as well.
Trade 1的答题思路与答案偏差很大。long volatilty 和 long duration 没有这个关系存在吗？
