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Financial Risk Manager Part 1

Financial Risk Manager Part 1

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Assume the three hedging securities: a 2-year, 5-year and 10-year bond. The maturities correspond to the three key rates at 2, 5 and 10 years. The key rate '01 (KRO1) for the bonds are given in the table below, and they are reported per $100 face value. The KRO1s of the underlying portfolio are given below (but they are reported for the face amount).

Key Rate 01s (per $100 Face)

Hedging Securities2-year5-year10-year
2-year bond0.010
5-year bond0.0100.040
10-year bond0.0100.0500.100

Key Rate 01s ($)

Underlying Portfolio2-year5-year10-year
20.060.0100.0

What is the face value of the two year (2-year) hedging bond that is required?

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