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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 (the dollar change in value for a one basis point fall in each key rate) of USD 120 at the 2-year, USD 300 at the 5-year, and USD 580 at the 10-year key rates. The portfolio's DV01 for a parallel one basis point shift is closest to:

The portfolio DV01 is USD 1,000. A parallel shift moves all key rates equally, so the total price sensitivity equals the sum of the individual key rate '01s: 120 plus 300 plus 580. Using only the largest exposure would understate the total interest rate risk.

  1. AUSD 1,000Correct
  2. BUSD 580
  3. CUSD 300
  4. DUSD 120

Explanation

For a parallel shift, every key rate moves by the same amount, so the portfolio DV01 is the sum of the key rate '01s: 120 + 300 + 580 = USD 1,000. Choosing 580 uses only the largest exposure and ignores the other key rates.

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