FRM Part I · FRM Exam Part I · Modeling Non-Parallel Term Structure Shifts and Hedging
A trader runs a DV01-neutral flattener, long 10-year bonds and short 2-year bonds, each leg with a DV01 of $8,000 per bp. Over a week the 2-year yield rises 4 bp and the 10-year yield rises 1 bp. What is the approximate P&L?
The trade earns about $24,000. The short 2-year leg gains $32,000 from a 4 bp yield rise, the long 10-year leg loses $8,000 from a 1 bp rise, and the net equals $8,000 times the 3 bp narrowing of the 2s10s spread.
- A-$24,000
- B+$8,000
- C+$24,000Correct
- D+$40,000
Explanation
The long 10-year loses 8,000 x 1 = $8,000 as yields rise. The short 2-year gains 8,000 x 4 = $32,000. Net = +$24,000, consistent with the 2s10s spread narrowing by 3 bp. Adding the two yield moves (+$40,000) ignores that the long leg loses.
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