Explanation:
Forward-bucket '01s are especially useful for risk managers and analysts who simply want to understand and closely examine the curve risk of a portfolio independently of any hedging instruments. In contrast, partial '01s (or key rate '01s) are intrinsically linked to the specific benchmark securities selected as hedging instruments, making them more suitable when a portfolio is actively being hedged. Since the Bank does not plan to hedge and only wishes to evaluate the curve risks, forward-bucket '01s are the most appropriate instrument.
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Q.85 Marmagne Bank from Bourges, France, needs to calculate the risk level of some bond portfolios. In this stage of the calculation, the Bank does not plan to hedge any of the portfolios but only to closely examine and understand the curve risks of the portfolios in question. What would be the instruments best used for the purpose of understanding the curve risks?
A
Partial '01s
B
Forward-bucket '01s
C
Both partial '01s and forward-bucket '01s
D
None of the above