The effective duration of a bond portfolio is a measure of its sensitivity to changes in interest rates. It is typically expressed as the percentage change in price for a 100 basis point (100 bp) change in interest rates. The calculation provided in the file content shows how to determine the effective duration using the given information:

1. The portfolio's value increases to USD 127.70 million if all interest rates fall by 20 basis points (bps).
2. The portfolio's value decreases to USD 122.20 million if all interest rates rise by 20 bps.
3. The original value of the portfolio is USD 125.00 million.

The formula for effective duration (D) is applied as follows: $D = \frac{(AP - P)}{P \times \Delta r} \times 100$

Where:

• $AP$ is the adjusted price (either higher or lower depending on the interest rate change).
• $P$ is the original price of the portfolio.
• $\Delta r$ is the change in interest rates, which in this case is 20 bps or 0.002.

Using the increase in value: $D = \frac{(127.70 - 125.00)}{125.00 \times 0.002} \times 100 \approx 11.0 \%$

This calculation shows that for every 100 basis point decrease in interest rates, the portfolio's value would increase by approximately 11%. The effective duration is thus closest to 11.0, which corresponds to option B. The other options (A, C, and D) are incorrect due to misapplications of the formula, such as using the wrong values or not applying the correct multiplier in the denominator.