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FRM Part I · FRM Exam Part I · Modeling Non-Parallel Term Structure Shifts and Hedging

A bond portfolio has key rate 01s (dollar gain for a 1 bp fall in the relevant key rate) of $120 at the 2-year point, $300 at the 5-year point and -$50 at the 10-year point. Approximately what is the portfolio's gain for a 1 bp parallel fall in all key rates?

The gain is about $370. A parallel 1 bp fall moves every key rate, so the portfolio DV01 equals the sum of the key rate 01s: 120 plus 300 minus 50. The negative 10-year exposure reduces the total and must keep its sign.

  1. A$370Correct
  2. B$470
  3. C$300
  4. D$123

Explanation

For a parallel shift of all key rates, the key rate 01s add up to the portfolio DV01: 120 + 300 - 50 = $370. Treating the 10-year figure as +50 gives $470, which ignores its negative sign. Using only the largest bucket ($300) ignores the other exposures.

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