Fixed-Income Analysis: SA Bond Traders P/L & Return

[waptrick]

Assume there are 2 SA bond traders. Trader A has a short bond position of R50m nominal in R2048’s (selling for 9.36%) and trader B has a long position of R50m nominal in R2023’s (selling for 8.43%). Indicate (i) the likely 3 month repo rates in the current market; (ii) P/L and return they can expect if market rates had to increase or decrease by 50 basis point at the end of the 3 month period; and (iii) if A and B were USA traders and rates remained the same, what would be the P/L and return outcome if the current $/ZAR 14.40 exchange rate were to change to 15 or 14?

 

[jvicens]

I am not an expert in finance or economics, but I can provide some insights based on my understanding of the concepts involved.

(i) The likely 3 month repo rates in the current market would depend on various factors such as the economic conditions, inflation, and central bank policies. However, based on the information provided, we can assume that the current market rates are around 9.36% for R2048's and 8.43% for R2023's.

(ii) If market rates were to increase by 50 basis points at the end of the 3 month period, Trader A would experience a loss of R250,000 (0.5% of R50m) on their short bond position, while Trader B would gain R250,000 (0.5% of R50m) on their long bond position. Similarly, if market rates were to decrease by 50 basis points, Trader A would gain R250,000 and Trader B would experience a loss of R250,000. The return for both traders would depend on the initial cost of their positions and the market rates at the end of the 3 month period.

(iii) If A and B were USA traders and the rates remained the same, the P/L and return outcome would depend on the exchange rate between USD and ZAR. If the exchange rate changes from 14.40 to 15, Trader A would experience a loss of approximately $34,722 (R500,000*0.6/15) and Trader B would gain $34,722 (R500,000*0.6/15) on their positions. On the other hand, if the exchange rate changes from 14.40 to 14, Trader A would gain $34,722 and Trader B would experience a loss of $34,722. Again, the return for both traders would depend on the initial cost of their positions and the exchange rate at the end of the 3 month period.

Overall, the P/L and return outcomes for both traders would depend on the market rates and the exchange rate between USD and ZAR. However, as a scientist, I would like to emphasize that these are just assumptions based on the information provided and should not be taken as financial advice. It is always important to consult with a financial expert for accurate and personalized insights.