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FRM Part II · FRM Exam Part II · VaR Mapping

Which instrument is typically mapped to risk factors by decomposing it into its constituent cash-flow or position building blocks, such as a long position in a foreign bond funded by a short position in domestic currency?

A forward foreign exchange contract is mapped by decomposing it into building blocks: a foreign zero-coupon bond position, an offsetting domestic zero-coupon bond position, and the spot exchange rate exposure. Each block then maps to its own risk factor.

  1. AA forward foreign exchange contractCorrect
  2. BA common stock in the domestic market
  3. CA listed index future with no maturity
  4. DA zero-coupon bond in the domestic currency

Explanation

A forward FX contract is decomposed into a long position in a foreign zero-coupon bond, a short position in a domestic zero-coupon bond, and a spot FX exposure. Each building block is then mapped to its risk factor (foreign rate, domestic rate, spot FX). The other choices map to a single factor.

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