A PM has assets of $200m and liabilities of $100m. He wants to lower duration to 4. Assets have duration of 6 and liaiblities of 1.
The question asks how many contracts needed to lower duration. I took out duration of equity and used that to bring it to down to target duration but the mock exam answer actually uses duration of only assets and asset value of $200m. COmpletely ignores liabilities here. Want to know how that makes sense?
where is the question? i remember a question similar but it specified adjusting duration of assets
This is the Berg Case Scenario. Alpha consultants-Sample exam from 2012 i think.
Assets include liability.
Assets = Equity + Liability. That is what you should use.
But we are tyring to change duration of portfolio. Portfolio isnt just made of assets. What you have there is an accounting equation but if our assets have duration of 6, our portfolio duration isnt 6-YOu get what I am trying to say?
Accounting equation also applies to duration because duration is additive.
think of duration contribution.
Assets duration = duration contribution of equity + duration contrubition of liability
Look at question 19 and 20 in CFAI 2015 PM mock.
5.5 = 10(0.5) + 1(0.5)
The question explicitly asks. His new duration target for the asset portfolio is 4.25.
can you tell me which question you are looking at?