FRM Part I · FRM Exam Part I · Modeling Non-Parallel Term Structure Shifts and Hedging
In the key rate shift technique applied to a spot rate curve, the 5-year key rate is shifted by 1bp, with adjacent key rates at 2 years and 10 years held fixed and shifts interpolated linearly between key rates. What is the size of the spot rate shift at the 8-year maturity?
The shift at 8 years is 0.4 basis points. The key rate shift is 1bp at 5 years and falls linearly to zero at 10 years, so at 8 years it is (10−8)/(10−5) = 0.4 of 1bp.
- A0.4 bp
- B0.6 bpCorrect
- C0.5 bp
- D1.0 bp
Explanation
The shift is 1bp at 5 years and declines linearly to 0 at 10 years. At 8 years, 3 of the 5 years toward the 10-year point remain... precisely, the fraction is (10−8)/(10−5) = 2/5 = 0.4 bp. So the 8-year shift is 0.4 bp, not 0.6 bp.
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.
More Modeling Non-Parallel Term Structure Shifts and Hedging questions
- A portfolio has key rate 01s of $4,000 at the 5-year point and $10,000 at the 10-year point. It is to be hedged by shorting two bonds. Bond …
- A fund manager holds a bond portfolio with a DV01 of $45,000 and wants to reduce this to a target DV01 of $10,000 using Treasury futures. Ea…
- A PCA of yield curve changes yields a first component with loadings of 0.45, 0.50, 0.52, 0.51 across the 2-, 5-, 10- and 30-year key rates, …
- A portfolio has key-rate DV01 exposures of +$40,000 at the 2-year, -$10,000 at the 5-year and -$20,000 at the 10-year (per 1 bp fall in the …
- A bond portfolio has key-rate 01s (the gain for a 1 bp fall in each key rate) of $3,000 at the 2-year point, $5,000 at the 5-year point and …
- A portfolio has exposures (change in value per 1 bp rise in the rate) to the 2-year, 5-year and 10-year rates of -$40,000, -$10,000 and +$30…