FRM Part I · FRM Exam Part I · Modeling Non-Parallel Term Structure Shifts and Hedging
A portfolio has key rate 01s (gain per 1 bp fall in the rate) of $200 at 2 years, $500 at 5 years and $800 at 10 years. Over a day the 2-year rate rises 5 bp, the 5-year rate is unchanged and the 10-year rate falls 10 bp. What is the approximate P&L?
The approximate P&L is a gain of $7,000. The 2-year rise costs $1,000, the 5-year is unchanged, and the 10-year fall of 10 bp earns $8,000. Summing the key rate effects with the correct signs gives the net gain.
- A+$7,000Correct
- B-$7,000
- C+$9,000
- D+$8,000
Explanation
2-year: rate up 5 bp gives -200 x 5 = -1,000. 5-year: 0. 10-year: rate down 10 bp gives +800 x 10 = +8,000. Total = +$7,000. Reversing signs gives -$7,000, and adding the 2-year effect as a gain gives $9,000.
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