Skip to content

FRM Part II · FRM Exam Part II · VaR Mapping

A portfolio manager compares duration mapping with cash-flow mapping for a 10-year coupon bond. Which statement is correct?

Duration mapping places the bond's value at the vertex matching its duration, capturing average timing but ignoring the dispersion of cash flows. Cash-flow mapping treats each payment individually, so it is generally more precise, and the two methods do not generally give identical VaR.

  1. ADuration mapping uses the bond's duration to select one vertex, and is generally less precise than cash-flow mapping because it ignores the dispersion of cash flowsCorrect
  2. BDuration mapping splits each cash flow among the two nearest vertices and is the most precise method
  3. CCash-flow mapping uses only the maturity vertex of the bond
  4. DDuration mapping and cash-flow mapping always give identical VaR for any bond

Explanation

Duration mapping maps the bond's whole value to the vertex matching its duration, so it captures average timing but not how cash flows are spread along the curve. Cash-flow mapping treats each payment separately and is more accurate. The other options misdescribe the methods.

Did you get it right without looking?

One question tells you little. A timed set on VaR Mapping shows your real accuracy, how long you take and where you lose marks.

Practise VaR MappingFree diagnostic mock

More VaR Mapping questions