Exam 1: An Introduction to Fixed Income Markets

What are the steps to take a short position on a given U.S. security via the repo market?

Is the following an arbitrage opportunity? A free car that if I repair well, I won't have to spend money on gasoline or maintenance costs (i.e. repairs) ever.

Is the following an arbitrage opportunity? A bond that cost nothing but will payoff zero with certainty in the future.

Is the following an arbitrage opportunity? Suppose you are in the desert and are given a bag of ice with a penny inside. Assume that the ice will melt instantly and the cost of disposing of the bag is zero.

You are told that there is an ample supply for the bond mentioned in question 13. Does this affect your previous answer?

What are the steps to take a long position on a given U.S. security via the repo market?

What steps would you follow in order to take advantage of the following arbitrage opportunity (if there is one)? Security A costs $100 and pays $120 in 3 years. Security B costs $100 and pays $110 in one year. Your friend tells you that he would like you to lend him $110 in a year and that he would give $130 the following year. Finally you know that in two years, with $130, you can invest in a security that will pay you either $140 or $121 (with equal probability) after a year. 2

You find a bond that has a repo rate substantially lower than the GCR. Is this, for certain, an arbitrage opportunity?

Intuitively, is the Federal Funds rate generally higher, lower or the same as LIBOR? Why?

What steps would you follow in order to take advantage of the following arbitrage opportunity (if there is one)? Security A costs $3 and pays $5 in 2 years, while security B costs $3 and pays $4 in 2 years.

Intuitively, is LIBOR generally higher, lower or the same as the repo rate? Why?

What are the gains from trade of entering into a swap for these two ?rms?

Is the following an arbitrage opportunity? A security that cost zero and might pay a dollar in the future, but pays zero otherwise.

What are the gains from trade of entering into a swap for these two ?rms?

Is the following an arbitrage opportunity? A gift that makes me feel good just by having it.

What are the gains from trade of entering into a swap for these two ?rms?

What steps would you follow in order to take advantage of the following arbitrage opportunity (if there is one)? Security A costs $100 and pays $110 in 2 years. Security B costs $100 and pays $109 in one year. You know that in a year with $109 you can invest in a security that pays $120 or $109 (with equal probability) the following year.