Explanation:
Let's analyze each option:
Option A: Incorrect. Principal mapping only considers the principal payment at maturity, not coupon payments. The portfolio VaR using principal mapping is typically less than cash-flow mapping because it ignores intermediate cash flows.
Option B: Incorrect. Duration mapping does not consider intermediate cash flows (correct), but the portfolio VaR using duration mapping is generally greater than principal mapping, not less.
Option C: Incorrect. Cash-flow mapping considers ALL cash flows (coupons and principal), not just redemption payments. The VaR using cash-flow mapping is typically greater than duration mapping due to more granular risk measurement.
Option D: Correct. Cash-flow mapping considers the present values of all cash flows grouped into maturity buckets. The undiversified portfolio VaR using cash-flow mapping is indeed greater than the portfolio VaR using principal mapping because:
Key differences between mapping methods:
Cash-flow mapping provides the most accurate risk measurement but requires more computational effort.
Ultimate access to all questions.
Q-55. A portfolio manager is mapping a fixed-income portfolio into exposures on selected risk factors. The manager is analyzing the comparable mechanics and risk measurement outputs of principal mapping, duration mapping, and cash-flow mapping that correspond to the average portfolio maturity. Which of the following is correct?
A
Principal mapping considers coupon and principal payments, and the portfolio VaR using principal mapping is greater than the portfolio VaR using cash-flow mapping.
B
Duration mapping does not consider intermediate cash flows and the portfolio VaR using such method is less than the portfolio VaR using principal mapping.
C
Cash-flow mapping considers the timing of the redemption cash flow payments only, and the portfolio VaR using cash flow mapping is less than the portfolio VaR using duration mapping.
D
Cash-flow mapping considers the present values of cash flows grouped into maturity buckets, and the undiversified portfolio VaR using cash-flow mapping is greater than the portfolio VaR using principal mapping.
No comments yet.