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

A portfolio has a level exposure of 25,000 and a slope exposure of -5,000 (dollar change per unit factor move). A futures contract has exposures of +50 (level) and +30 (slope) per contract. The manager shorts 500 contracts to neutralise the level exposure. What is the portfolio's remaining slope exposure after the hedge?

The remaining slope exposure is -20,000. Shorting 500 contracts cancels the 25,000 level exposure but adds -15,000 of slope exposure, which compounds the portfolio's existing -5,000. A single-instrument level hedge can therefore increase slope risk.

  1. A-20,000Correct
  2. B-5,000
  3. C+10,000
  4. D-15,000

Explanation

Shorting 500 contracts gives level exposure of -500*50 = -25,000, which offsets the portfolio's 25,000. The short also contributes -500*30 = -15,000 of slope exposure. Net slope = -5,000 + (-15,000) = -20,000. The single-instrument hedge makes the slope exposure worse. +10,000 comes from using the wrong sign on the futures slope.

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