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

A bond portfolio has the following key rate DV01s, each measured as the dollar loss for a 1 bp rise in that key rate with triangular shifts: 2-year $120, 5-year $340, 10-year $410, 30-year $130. Which figure best approximates the portfolio's DV01 for a 1 bp parallel shift of the whole curve?

The parallel DV01 is about $1,000, the sum of the key rate DV01s. Triangular key rate shifts add up to a 1 bp parallel move, so the sum of the individual exposures (120 + 340 + 410 + 130) approximates the exposure to a parallel shift.

  1. A$410
  2. B$250
  3. C$1,000Correct
  4. D$1,200

Explanation

Key rate shifts are built so that moving all key rates by 1 bp together reproduces a parallel 1 bp shift. The key rate DV01s therefore sum to the parallel DV01: 120 + 340 + 410 + 130 = $1,000. Using only the largest exposure ($410) ignores the other three maturities.

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