Hi,
Can you please assist in explaining why the duration of the bond is 7 years I.e. (10)0.5] and why the answer multiplies by 3.16?
Is this also a type of question we can expect in the exam?
Question:
Hong Kong Shanghi Bank has entered into a repurchase agreement with a client where the client will sell a 10-year US treasury bond to the bank and repurchase it in 10 days. The bond has a notional value of USD 10m, trades at par with the yield volatility for a 10-year US treasury 0.074%. The swap's maximum potential exposure at a 99% confidence level is closest to:
a. USD 320,000 b. USD 380,000 c. USD 550,000 d. USD 1,200,000
CORRECT: B
The approximate duration for a 10 year bond is 7.0. The volatility of the swap value over 10 years is calculated as follows: σ(V) = [market_value * duration * yield volatility *(10)0.5] = 10,000,000 * 7.0 * 0.00074 * 3.16 = 163,806.
To get the 99% confidence interval, we multiply σ(V) by 2.33, which gives approximately $380,000.
Can you please assist in explaining why the duration of the bond is 7 years I.e. (10)0.5] and why the answer multiplies by 3.16?
Is this also a type of question we can expect in the exam?
Question:
Hong Kong Shanghi Bank has entered into a repurchase agreement with a client where the client will sell a 10-year US treasury bond to the bank and repurchase it in 10 days. The bond has a notional value of USD 10m, trades at par with the yield volatility for a 10-year US treasury 0.074%. The swap's maximum potential exposure at a 99% confidence level is closest to:
a. USD 320,000 b. USD 380,000 c. USD 550,000 d. USD 1,200,000
CORRECT: B
The approximate duration for a 10 year bond is 7.0. The volatility of the swap value over 10 years is calculated as follows: σ(V) = [market_value * duration * yield volatility *(10)0.5] = 10,000,000 * 7.0 * 0.00074 * 3.16 = 163,806.
To get the 99% confidence interval, we multiply σ(V) by 2.33, which gives approximately $380,000.