Answer Happy

Please help me with the following question, there is only one
option that is correct. Please also explain why is the option
correct and other options are wrong.
QUESTION 2 A hedge fund manager is forming an arbitrage potfolio in the fixed income market. Today, a coupon bond C that matures in 3 years is traded at 95.03 with semi-annual coupon 2% while a zero-coupon bond Z that matures in 10 years is traded at 102.45 Both C and Z have the same principal P). Based on a benchmark model, the manager identifies that C is being underpriced and Z is being overpriced in the market. Subsequently, the manager takes a long position on C and a short position on Z such that the absolute position value of the long position is equal to that of the short position (e.g. $1 million long position in C and $1 million short position in Z). Which of the following statement(s) is CORRECT according to the above? (Assume that the manager's benchmark model is correct.) i. The manager's arbitrage position should not have any systematic risk. ii. If market interest rates go up, the value of the position would go up. iii. The higher the change in market interest rates, the higher the change in the value of the position at an increasing rate (= convex relationship). Οι iii O i and iii