This workout follows on from workout one. So if you haven't yet watched it, please go back and do so. We have to use the data given and calculate it in workout one to answer the follow-up questions below.

The first question is, what would the total initial cash cashflow at trade inception be? We are told we can borrow and invest at SOFR flat, and we are also asked what the daily net carry of this position would be.

We are given a current SOFR rate of 5.33%.

We'll start by pulling in the notional amounts. We calculated in workout one, so that's 64.8 million for the 10 year and 33.2 million for the 30 year. We also need the prices of the bonds.

So from workout one price of the 10 year bond is 95.2 and the 30 year is 92.45. Now that we have the notional and the price, we can work out the settlement amount, which is simply the notional times the price.

As we are shorting the 10 year bond, we will be receiving $61.7 million. However, as we are long, the 30 year bond, we need to pay this amount, so that needs to be a negative.

And the net cashflow is simply the sum of those two, the amount being received and the amount being paid. We can invest this net cash inflow at SOFR flat and to work out the daily investment proceeds. We take the amount times SOFR, and then divide by 360 as is convention when working with SOFR, and that gives us proceeds of 4,597.68.

We then need to work out the net daily accrued, which is going to be the coupons on the two bonds.

Starting with the 30 year, because that is the coupon we will be receiving. We take the notional amount of the 30 year, multiply that by the coupon rate, which we find on the workout one sheet, so a coupon of 4.25%. And then to get this to a daily amount, we're going to divide by 365. As is the convention when working with treasuries, we are then going to subtract the coupon on the 10 year bond, which we are short. So going back and getting the notional amount of the 10 year, multiplying that by the 10 year coupon on the workout one tab, and again dividing by 365 to get the daily amount. So the net daily accrued is negative 3,242.65. Netting off the daily investment proceeds with the net daily accrued. Gives us the daily net carry, which is 1,355.03.

Part B of this workout asks what the approximate P&L on this trade would be if at the end of the same day the curve has flattened and 10s30s now trade at exactly nine basis points.

We need to work out the flattening in basis points. And to do that, we're going to go back to work out one and pick up what the difference in yields was when we entered, which was 11.89 basis points. And we are going to subtract nine because that is the differential today. And that gives us a flattening of 2.89 basis points. And now working out the approximate P&L is easy because we structured this trade to give us a DV01 of $50,000 that was told to us at the start of workout one. So $50,000 DV01. So that means for every one basis point change in yield, we make $50,000. So 2.89 basis point change in yield, multiply that by 50,000, and it's probably best to just go pick up the number rather than hard code it in from the first tab gives us an approximate P&L of $144,421.

Note that we have not considered the impact of convexity here, but that should be small given the relatively small change in the curve.

Finally, part C of this workout tells us to assume that at the end of the same day the curve has seen a parallel shift up of 10 basis points for each maturity. And the question is, what would the P&L impact of such a move be? Well, the 10s30s flattener position involves being longer the 30 year bond and short the 10 year bond with notional amounts adjusted so that the net DV01 of the position is zero for a parallel shift, meaning the position is initially hedged against small parallel movements in rates. However, due to the different convexity of the two bonds, a parallel upward shift in yields of 10 basis points will lead to a non-zero P&L impact. The 30 year bond has higher convexity than the 10 year bond, which means its price will decline less than that of the 10 year bond when yields rise.

As a result, although the first order DV01 effects cancel out the second order, convexity effects do not. The long 30 year bond benefits more from convexity than the short 10 year bond loses. Therefore, the overall P&L impact of the 10 basis points parallel upward shift will be positive for the flattener position.