Abstract

http://ssrn.com/abstract=2013270
 


 



Fixed Income Arbitrage in a Financial Crisis (A): US Treasuries in November 2008


Ryan Taliaferro


Acadian Asset Management

Stephen Blyth


Harvard Management Company

June 22, 2011

Harvard Business School Finance Case No. 211-049

Abstract:     
Investment manager James Franey confronts an apparent arbitrage opportunity during the global financial crisis of 2008 when he notices a wide yield spread between two U.S. Treasury bonds that mature on the same date. Franey must decide if there is an opportunity, how to structure a trade to exploit it, and how much of his fund's capital to allocate. Case exposition includes considerable detail on financing arrangements, particularly short-selling, margin lending, and repurchase agreements, that support relative-value strategies. Careful attention is paid to the bond math calculations that support the protagonist's analysis and decision. All quoted prices in the case are real and historical, and corresponding Bloomberg commands are provided for each as footnotes.

Learning Objective:
This case may be used: to review bond valuation and associated measures of bonds' price-sensitivities to interest rates; to review the Law of One Price (LOOP) and resulting opportunities when LOOP fails; to describe the mechanics of exploiting violations of LOOP; and to describe hedge fund financing arrangements, particularly short-selling, margin lending, and repurchase (repo) agreements. The case also may be used: to discuss the causes of anomalous securities prices during the 2008 crisis; to explore causes and consequences of the 2008 crisis generally; and to discuss possible interventions by government, central banks, and other oversight bodies.

working papers series


Not Available For Download

Date posted: March 1, 2012  

Suggested Citation

Taliaferro, Ryan and Blyth, Stephen, Fixed Income Arbitrage in a Financial Crisis (A): US Treasuries in November 2008 (June 22, 2011). Harvard Business School Finance Case No. 211-049. Available at SSRN: http://ssrn.com/abstract=2013270

Contact Information

Ryan Taliaferro (Contact Author)
Acadian Asset Management ( email )
260 Franklin Street
Boston, MA 02110
United States
Stephen Blyth
Harvard Management Company ( email )
600 Atlantic Avenue
Boston, MA 02210
United States
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