Hong Kong Shanghi Bank has entered into a repurchase agreement with a client where the client will sell a 10-YR 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-YR US Treasury of 0.074%. The swap’s maximum potential exposure at a 99% confidence level is closest to: a) USD 320K b) USD 380K c) USD 550K d) USD 1200K My question: How can I find out duration for that bond is 7? The only way I was able to solve this problem is by using effective duration and inventing a coupon and a yield and I found out a duration of 7.7 which gave me an answer of 420K that I rounded down to 380K… I just don’t understand where the duration of exactly 7 is coming from with that little information! Please help lol. Thanks.
??? invent a coupon? duration is depending on coupon if coupon is high the duration is low and vice versa. isn’t there a repo rate given???
What’s the answer? Where’s the Q from?
Answer is 380K It’s from the second FRM 2007 Exam. I know you need a duration to calculate a bond VAR… So I made assumptions about the bond… For example I said lets say this 10-YR bond is 5% YTM with 5% Coupon and is trading at par for that reason… I do +1% and -1% from the 5% YTM and I got 7.7… But in the answer book, they just say straight… “Knowing that the duration of that 10YR bond is 7”… You calculate the VAR as 2.33 * 10 000 000 * 0.00074 * 7 * SQR(10)… My question: How did they figure out the duration is 7, if its not written anywhere it is 7? No that is all there is…
it said it is trading at par!!!
Ok but even if I know it’s trading at par… How do I know duration is equal to 7? Where that number comes from lol.