FRM Part I · FRM Exam Part I · Modeling Non-Parallel Term Structure Shifts and Hedging
A bond portfolio has key rate 01s (value change per 1 bp fall in the relevant key rate, all other key rates unchanged) of $150 at the 2-year point, $400 at the 5-year point and $450 at the 10-year point. Which is the best estimate of the portfolio's DV01 for a 1 bp parallel shift of the whole curve?
The DV01 is about $1,000 because a parallel shift moves all key rates together, so the portfolio's total sensitivity is the sum of the bucket exposures: 150 + 400 + 450. Averaging or using only the largest bucket understates the exposure.
- A$450
- B$333
- C$1,000Correct
- D$400
Explanation
A parallel shift moves every key rate by 1 bp, so the portfolio's DV01 is approximately the sum of the key rate 01s: 150 + 400 + 450 = $1,000. The $333 figure averages the exposures instead of adding them, and $450 only counts the largest bucket.
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