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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 gain for a 1 bp fall in each key rate) of $3,000 at the 2-year point, $5,000 at the 5-year point and $7,000 at the 10-year point. What is the portfolio's approximate DV01 for a small parallel shift in the whole curve?

The parallel-shift DV01 is $15,000. A one basis point parallel move shifts every key rate by one basis point, so the portfolio's total sensitivity equals the sum of its key-rate 01s: 3,000 plus 5,000 plus 7,000.

  1. A$15,000Correct
  2. B$5,000
  3. C$7,000
  4. D$105,000

Explanation

For a parallel shift of 1 bp, every key rate moves by 1 bp, so the total DV01 is the sum of the key-rate 01s: 3,000 + 5,000 + 7,000 = $15,000. The $5,000 option averages the exposures instead of adding them. The $105,000 option multiplies them in some way that has no meaning here.

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