Financial Risk Manager Part 1
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A fund administrator is studying the implications of changes in yield rates on the value of two different portfolios: portfolio ASD, consisting of two zero-coupon bonds, and portfolio BTE, holding a single zero-coupon bond. Detailed characteristics of these portfolios are provided in the table below:
Portfolio Components Yield (%) Maturity (years) Face value Portfolio ASD Bond 1 10% 3 USD 1,000,000 Bond 2 10% 9 USD 1,000,000 Portfolio BTE Bond 3 8% 6 USD 1,000,000
To evaluate the potential effect of a uniform increase in the yield curve on the portfolio values, the administrator simulates a scenario where the yield rates rise by 20 basis points across the entire yield curve. Moreover, the convexity values have been calculated as 34.51 for portfolio ASD and 36.00 for portfolio BTE. Assuming continuous compounding, what are the most accurate predictions for the decrease in the value of both portfolios due to the combined effects of duration and convexity?
A fund administrator is studying the implications of changes in yield rates on the value of two different portfolios: portfolio ASD, consisting of two zero-coupon bonds, and portfolio BTE, holding a single zero-coupon bond. Detailed characteristics of these portfolios are provided in the table below:
| Portfolio | Components | Yield (%) | Maturity (years) | Face value |
|---|---|---|---|---|
| Portfolio ASD | Bond 1 | 10% | 3 | USD 1,000,000 |
| Bond 2 | 10% | 9 | USD 1,000,000 | |
| Portfolio BTE | Bond 3 | 8% | 6 | USD 1,000,000 |
To evaluate the potential effect of a uniform increase in the yield curve on the portfolio values, the administrator simulates a scenario where the yield rates rise by 20 basis points across the entire yield curve. Moreover, the convexity values have been calculated as 34.51 for portfolio ASD and 36.00 for portfolio BTE. Assuming continuous compounding, what are the most accurate predictions for the decrease in the value of both portfolios due to the combined effects of duration and convexity?