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FRM Part II · FRM Exam Part II · Global Financial Stability Report, April 2025, Chapter 2 (Geopolitical Risk)

A bank's treasury unit has a USD 4.0 billion trading book of sovereign and corporate bonds with a modified duration of 5. After a geopolitical shock, yields on these bonds rise by 60 basis points uniformly. Ignoring convexity, what is the approximate mark-to-market loss?

The approximate loss is USD 120 million. Price change equals modified duration times the yield change times portfolio value: 5 × 0.60% × USD 4.0 billion. This market-risk channel shows how geopolitical-driven yield spikes directly reduce the value of a bank's securities holdings.

  1. AUSD 60 million
  2. BUSD 120 millionCorrect
  3. CUSD 240 million
  4. DUSD 12 million

Explanation

Loss ≈ modified duration × yield change × value = 5 × 0.0060 × 4,000 million = USD 120 million. Using 0.006 incorrectly as 0.003 gives 60 million; using 10 duration gives 240 million; a decimal slip gives 12 million.

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