CMA Final · Risk Management in Banking and Insurance · Market Risk Management
A bank holds a bond with modified duration of 4.5 and market value of Rs 200 crore. If yields rise by 50 basis points, the approximate change in the bond's value, ignoring convexity, is:
The bond value falls by about Rs 4.5 crore. Price change equals minus modified duration times yield change times value, which is 4.5 x 0.5% x Rs 200 crore. Rising yields lower bond prices, and the 50 basis point shift must be used rather than one percent.
- AIncrease of Rs 4.5 crore
- BDecrease of Rs 9.0 crore
- CDecrease of Rs 4.5 croreCorrect
- DDecrease of Rs 45.0 crore
Explanation
Change = -ModDuration x change in yield x value = -4.5 x 0.005 x 200 = -Rs 4.5 crore. An increase ignores the inverse price-yield relationship. Rs 9 crore results from using a 100 bp shift instead of 50 bp.
Did you get it right without looking?
One question tells you little. A timed set on Market Risk Management shows your real accuracy, how long you take and where you lose marks.
More Market Risk Management questions
- A bank's one-day 99% Value at Risk (VaR) for its trading portfolio is Rs 4 crore. Assuming returns are independent and normally distributed …
- A bank's 99% one-day VaR is estimated at Rs 10 crore. Over the last 250 trading days, backtesting shows 7 days on which actual losses exceed…
- Backtesting of a bank's 99% one-day VaR model over 250 trading days shows 7 exceptions. Under the Basel traffic-light approach for internal …
- A bank holds a bond portfolio worth Rs 200 crore with modified duration of 4.5. If yields rise by 50 basis points across the curve, what is …
- Under the Basel framework, which of the following correctly describes the 'banking book' versus 'trading book' distinction for market risk c…
- Which of the following is a limitation of Value at Risk as a market risk measure that Expected Shortfall (ES) addresses?