QUESTIONS & VERIFIED ANSWERS|A+ GRADED|BRAND NEW
A portfolio manager holds USD 88 million face value of zero-coupon bonds maturing in 5
years and yielding 4%. The portfolio manager expects that interest rates will increase. To
hedge the exposure, the portfolio manager wants to sell part of the 5-year bond position
and use the proceeds from the sale to purchase zero-coupon bonds maturing in 1.5 years
and yielding 3%. Assuming continuous compounding, what is the market value of the 1.5-
year bonds that the portfolio manager should purchase to reduce the duration on the com-
bined position to 3 years?
A.
USD 31.00 million
B.
USD 37.72 million
C.
USD 41.17 million
D.
USD 50.28 million
ANSWER
Correct Answer:
C
Explanation:
In order to find the proper amount, we first need to calculate the current market value of
the portfolio (P).
Assuming continuous compounding, the current value of the portfolio is:
P = 88 * e-0.04*5 = USD 72.05 million
1.5*W + 5*(1 - W) = 3, which gives W = 0.5714
1
, (1 - W) = 0.4286
Therefore, the value of the 1.5-year maturity bond = 0.5714*72.05 = USD 41.17 million.
31.
An experienced commodities risk manager is examining corn futures quotes from the CME
Group. Which of the following observations would the risk manager most likely view as a po-
tential problem with the quotation data?
A.
The volume in a specific contract is greater than the open interest.
B.
The prices indicate a mixture of normal and inverted markets.
C.
The settlement price for the most active contract is above the high price for the day.
D.
There is a contract with maturity every month.
ANSWER
Correct Answer:
C
Explanation:
The reported high price of a futures contract should reflect all prices for the day, so the set-
tlement price should never be greater than the high price.
30.
A modeling team at a risk management consulting firm is debating whether it is appropriate
to use the bootstrap technique to analyze a particular sample of data. Which of the follow-
ing represents a situation where the bootstrap technique will be ineffective?
2
A portfolio manager holds USD 88 million face value of zero-coupon bonds maturing in 5
years and yielding 4%. The portfolio manager expects that interest rates will increase. To
hedge the exposure, the portfolio manager wants to sell part of the 5-year bond position
and use the proceeds from the sale to purchase zero-coupon bonds maturing in 1.5 years
and yielding 3%. Assuming continuous compounding, what is the market value of the 1.5-
year bonds that the portfolio manager should purchase to reduce the duration on the com-
bined position to 3 years?
A.
USD 31.00 million
B.
USD 37.72 million
C.
USD 41.17 million
D.
USD 50.28 million
ANSWER
Correct Answer:
C
Explanation:
In order to find the proper amount, we first need to calculate the current market value of
the portfolio (P).
Assuming continuous compounding, the current value of the portfolio is:
P = 88 * e-0.04*5 = USD 72.05 million
1.5*W + 5*(1 - W) = 3, which gives W = 0.5714
1
, (1 - W) = 0.4286
Therefore, the value of the 1.5-year maturity bond = 0.5714*72.05 = USD 41.17 million.
31.
An experienced commodities risk manager is examining corn futures quotes from the CME
Group. Which of the following observations would the risk manager most likely view as a po-
tential problem with the quotation data?
A.
The volume in a specific contract is greater than the open interest.
B.
The prices indicate a mixture of normal and inverted markets.
C.
The settlement price for the most active contract is above the high price for the day.
D.
There is a contract with maturity every month.
ANSWER
Correct Answer:
C
Explanation:
The reported high price of a futures contract should reflect all prices for the day, so the set-
tlement price should never be greater than the high price.
30.
A modeling team at a risk management consulting firm is debating whether it is appropriate
to use the bootstrap technique to analyze a particular sample of data. Which of the follow-
ing represents a situation where the bootstrap technique will be ineffective?
2
