Reference no: EM133004540

A speculator expects the rate on investment grade, five-year fixed rate bonds to decrease from their current 4% level. Firstly, discuss the key features of a US Treasury futures strategy that would enable the speculator to benefit if the expected outcome is realized. Use a specific example and indicate the potential benefits and risks to the strategy (this should include a discussion of the initial and variation margin requirements of the clearing house for the exchange). An alternative strategy would be to use a swaption on a forward starting swap.

Problem 1: Explain the key terms relevant to using a swaption strategy for the speculator's expectation. You should provide specific details on the applicable terms for the forward swap and the costs of the option. Finally, outline the different scenarios that could arise affecting the pay-off function for the swaption.