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Today is Mar 16, 2011. Given the following information, determine which US TBond is currently...

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Finance

Today is Mar 16, 2011. Given the following information, determine which US TBond is currently cheapest to deliver (CTD, i.e. most profitable to carry arbitrage) on the Jun '11 US TBond futures contract - the 6.125s of Nov 2029 that have a stated price of 127-02 (and conversion factor of 1.0136) or the 6.375s of Aug 2027 that have a stated price of 129-18+ (and conversion factor, CF, of 1.0409). Note that the + in the stated price indicates an extra half 32nd; e.g., 129-18+ = 129 + 18.5/32 =129.578125. Assume that the TBonds will be delivered on 06/30/11 and the yield on the US TBill that matures on this date is 0.08%. The Jun '11 US TBond futures price is 122-16. Is a carry arbitrage expected to be profitable for the CTD? Since the CFs are given, you can overwrite the CF formulae given in the spreadsheet with the values given above. Write out, but do not solve, the equations that determine both TBonds carry arbitrage IRRs

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