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

Which statement about key rate exposures is correct?

The sum of the key rate exposures approximately equals the portfolio's effective duration or DV01 for a parallel shift. Key rate shifts are designed so that moving all of them together reproduces a parallel move, which makes the exposures additive to total sensitivity.

  1. AThe sum of a portfolio's key rate exposures approximately equals its effective duration (or DV01) for a parallel shiftCorrect
  2. BKey rate exposures can only be computed for zero-coupon bonds
  3. CA bullet bond's key rate exposure is spread evenly across all key rates
  4. DKey rate shifts require the chosen key rates to be equally spaced in maturity

Explanation

Key rate shifts are constructed so that moving all key rates by the same amount reproduces a parallel shift, so exposures add up to total duration or DV01. A bullet bond's exposure concentrates near its maturity key rate, and key rates need not be equally spaced.

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