Explanation:
Key rate exposures are used for measuring and hedging the risk of bond portfolios in terms of a relatively small number of the most liquid bonds available, usually the most recently issued, near-par, government bonds.
Forward-bucket '01s, mostly used in the swap or combined bond and swap contexts as well, measure the risk of a portfolio not in terms of other securities but in terms of direct changes in the shape of the term structure. As a result, forward-bucket '01s are often the most intuitive way to understand the curve risks of a portfolio, but not the quickest way to see the hedges required to neutralize such risks.
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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
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