A question about the model risk and spread risk associated with assumptions

CFA Level III Fixed Income
#1

Hello all,

In the Curriculum Book 4, SS10-11, Fixed income portfolio management, Reading 23 Liability-Driven and Index-Based Strategies, Question #5,

[question removed bt moderator]

I want to know that if the first assumption doesn’t hold, that is, the yield curve is not shifting in parallel, except that it can cause a duration mismatch between assets and liabilities, is it possible to raise spread risk? (I saw somewhere that nonparallel shifts would change the discount rates and present values of assets and liabilities, causing spread risk.) Thank you!

#2

If the assumptions fail, it sounds like bad assumptions — model risk.

Sure, if yieldcurves shift non-parallel nature, you can have spread risk… you can also have recession, economic meltdown or corruption. You can have many things.

#3

Think of model risk as a spread between assumptions used in a model and what actually happens in reality.

#4

To saurabh03121992

I think I understand what you mean, thank you.