Assignment 3 (Problem set -2 questions)

2.9) Repo Market

a) (Assignment Question Hint: Read 1st Chapter of the reading material)

i. Suppose at t=0 you think that G-Sec 10-year maturity on-the run bond is under-priced,
and you bet that its price will increase in the future. You don’t have the bond in your
hand, but you know there is a repo-market where you can take your position. Let the
price of the bond is Rs. 97.85. Let the repo-dealer charges a hair-cut of Rs. 0.25. Say
after time t=10 days, the price of the bond becomes Rs. 98.25. Find the realized return
𝑛
of the bond. (Use 360 notation).

ii. What if the price reaches 98.25 after t=180 days. Can you still make profit?