#### ravishankar80

##### New Member

List of questions where "I don't get it" is growing as exam approaches :down: .( A bit disappointed about the Flash Quiz because there are no reliable set of questions to practice on which cover all the AIMS and since you are best teacher I have come across your questions would have really helped practice better .)

Anyway will attempt some of your 2007 questions. I did not understand this question in 2007 FRM practice exam .It's from Hull and i am supposed to know it and i don't .I understand it is a Var calculation and the square root rule has been used but why duration?

Hong Kong Shanghi Bank has entered into a repurchase agreement with a client where

the client will sell a 10-year US treasury bond to the bank and repurchase it in 10 days.

The bond has a notional value of USD 10m, trades at par with the yield volatility for a 10-

year US treasury 0.074%. The swap’s maximum potential exposure at a 99% confidence

level is closest to:

a. USD 320,000

b. USD 380,000

c. USD 550,000

d. USD 1,200,000

CORRECT: B

The approximate duration for a 10 year bond is 7.0. The volatility of the swap value over

10 years is calculated as follows:

σ(V) = [market_value * duration * yield volatility *(10)0.5]

= 10,000,000 * 7.0 * 0.00074 * 3.16 = 163,806.

To get the 99% confidence interval, we multiply σ(V) by 2.33, which gives approximately

$380,000.

Reference: John Hull, Options, Futures, and Other Derivatives, 6th ed. Chapter 7.

Regards

Ravi