Based on FIXED INCOME ARBITRAGE IN A FINANCIAL CRISIS TED SPREAD AND SWAP SPREAD IN 2008 CASE C…

Based on FIXED INCOME ARBITRAGE IN A FINANCIAL CRISIS TED SPREAD AND SWAP SPREAD IN 2008 CASE C

Should Albert Mills do this trade? Back up your answer with the following analyses:

1. Write out the initial transaction and cash flows for the trade based on entering the swap, purchasing the Treasury bond, and borrowing using the repurchase agreement. Assume $1 billion notional principal for the swap and $0.97 billion face value for the Treasury bond. You may be very precise in your calculations or use the rounded numbers presented in the case. Assume that initial LIBOR is set at 2.51% and is fixed for three months (through February 2009), beginning the swap date (November 5, 2008). Be sure to take into account the 2% haircut on the repo.