Suzanne Evans
Well-Known Member
Questions:
204.1. When the 7 year par rate is 2.20%, a market maker sells (writes) $40.0 million face value of call options on a 7-year U.S. Treasury note with a strike of 110 and a dollar value of an '01 (DV01) of $0.0250 per 100 face value. The underlying U.S. Treasury note has a price of 109.00 and a DV01 of $0.0620 per 100 face value. Which is nearest to the hedge trade?
a. Short $3.9 million face amount of the T-notes
b. Short $9.0 million face amount of the T-notes
c. Purchase $5.5 million face amount of the T-notes
d. Purchase $16.1 million face amount of the T-notes
204.2. If the yield (YTM) is 6.0% per annum with semi-annual compounding, each of the following is TRUE except for which of the following is false?
a. The DV01 of a 4-year bond that pays a 6.0% coupon is about $0.035
b. The convexity of a 4-year bond that pays a 6.0% coupon is about 14.8 years^2
c. The Macaulay duration of a perpetuity that pays a 4.0% coupon is about 25.5 years
d. For any given maturity, a zero-coupon bond will have a higher duration and lower DV01 than a par bond
204.3. Each of the following is TRUE about key rate and bucket exposures, except for which is false?
a. If the maturity of a coupon bond were exactly equal to the term of a key rate and if the price of that bond were exactly par, then that bond’s yield would be identical to that key rate
b. Because the KR01s sum to DV01 and the key rate durations sum to duration, key rate shift technique does not really give us a genuine approach to multi-factor hedging as it still ultimately depends upon yield to maturity as the single interest rate factor
c. We can interpret key-rate exposures as a decomposition of the total DV01 or total duration of a security or a portfolio into exposures to different regions of the term structure
d. A market maker trying to hedge the interest rate risk of a large swap portfolio with Eurodollar futures will probably prefer to employ bucket shifts over key rates
Answers:
204.1. When the 7 year par rate is 2.20%, a market maker sells (writes) $40.0 million face value of call options on a 7-year U.S. Treasury note with a strike of 110 and a dollar value of an '01 (DV01) of $0.0250 per 100 face value. The underlying U.S. Treasury note has a price of 109.00 and a DV01 of $0.0620 per 100 face value. Which is nearest to the hedge trade?
a. Short $3.9 million face amount of the T-notes
b. Short $9.0 million face amount of the T-notes
c. Purchase $5.5 million face amount of the T-notes
d. Purchase $16.1 million face amount of the T-notes
204.2. If the yield (YTM) is 6.0% per annum with semi-annual compounding, each of the following is TRUE except for which of the following is false?
a. The DV01 of a 4-year bond that pays a 6.0% coupon is about $0.035
b. The convexity of a 4-year bond that pays a 6.0% coupon is about 14.8 years^2
c. The Macaulay duration of a perpetuity that pays a 4.0% coupon is about 25.5 years
d. For any given maturity, a zero-coupon bond will have a higher duration and lower DV01 than a par bond
204.3. Each of the following is TRUE about key rate and bucket exposures, except for which is false?
a. If the maturity of a coupon bond were exactly equal to the term of a key rate and if the price of that bond were exactly par, then that bond’s yield would be identical to that key rate
b. Because the KR01s sum to DV01 and the key rate durations sum to duration, key rate shift technique does not really give us a genuine approach to multi-factor hedging as it still ultimately depends upon yield to maturity as the single interest rate factor
c. We can interpret key-rate exposures as a decomposition of the total DV01 or total duration of a security or a portfolio into exposures to different regions of the term structure
d. A market maker trying to hedge the interest rate risk of a large swap portfolio with Eurodollar futures will probably prefer to employ bucket shifts over key rates
Answers:
