Skip to content

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

A portfolio's key-rate 01s (gain per 1 bp fall in the rate) are $4,000 at 2 years, $6,000 at 5 years and -$3,000 at 10 years. The curve then moves as follows: 2-year +2 bp, 5-year +4 bp, 10-year +10 bp. What is the approximate change in portfolio value?

The portfolio loses about $2,000. Multiply each key-rate 01 by its rate rise: 8,000 at 2 years, 24,000 at 5 years and -30,000 at 10 years, which sum to 2,000. Because rates rose, this is a loss, so the change is -$2,000.

  1. A-$2,000Correct
  2. B+$2,000
  3. C-$32,000
  4. D-$62,000

Explanation

Change = -(sum of key-rate 01 x rate rise) = -(4,000x2 + 6,000x4 + (-3,000)x10) = -(8,000 + 24,000 - 30,000) = -$2,000. The +$2,000 option gets the sign wrong. The -$62,000 option treats the 10-year exposure as a loss instead of a gain, and -$32,000 ignores the 10-year point.

Did you get it right without looking?

One question tells you little. A timed set on Modeling Non-Parallel Term Structure Shifts and Hedging shows your real accuracy, how long you take and where you lose marks.

Practise Modeling Non-Parallel Term Structure Shifts and HedgingFree diagnostic mock

More Modeling Non-Parallel Term Structure Shifts and Hedging questions