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

A bond portfolio has KR01 exposures (gain per 1bp fall) of USD 1,500 at the 2-year, USD 4,000 at the 5-year, and USD 6,500 at the 10-year key rate. The yield curve steepens: the 2-year rate falls 10bp, the 5-year rate is unchanged, and the 10-year rate rises 20bp. What is the approximate change in portfolio value?

The portfolio loses about USD 115,000. The 2-year fall gives a gain of USD 15,000, the 5-year is unchanged, and the 10-year rise of 20 basis points costs USD 130,000. Netting the gain and the loss gives a loss of USD 115,000.

  1. ALoss of USD 115,000Correct
  2. BGain of USD 115,000
  3. CLoss of USD 145,000
  4. DGain of USD 15,000

Explanation

2-year: rate falls 10bp, gain 1,500×10 = 15,000. 5-year: 0. 10-year: rate rises 20bp, loss 6,500×20 = 130,000. Net = 15,000 − 130,000 = −115,000. The USD 145,000 option adds the two effects instead of netting them.

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