Answer-first summary for fast verification
Answer: 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.
## 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: - Cash-flow mapping captures all cash flows (coupons + principal) - Principal mapping only considers the principal payment - More cash flows mean more risk exposure, leading to higher VaR **Key differences between mapping methods:** - **Principal mapping**: Simplest method, only considers principal payment - **Duration mapping**: Uses duration to approximate price sensitivity - **Cash-flow mapping**: Most comprehensive, maps all cash flows to maturity buckets Cash-flow mapping provides the most accurate risk measurement but requires more computational effort.
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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.