Swaps and Forex Risks Duration Related Query

agrawalanks
Posts: 3
Joined: Sat Nov 10, 2012 2:35 am

Swaps and Forex Risks Duration Related Query

Postby agrawalanks » Sun Nov 11, 2012 3:26 am

Can some one please explain how do we arrive at a duration of 7 years for this bond in the below question?

Hong Kong Shanghi Bank has entered into a repurchase agreement with a client where the client will sell a 10-year 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 treasury 0.074%. The swap’s maximum potential exposure at a 99% confidence level is closest to:
Choose one answer.

a. USD 1,200,000

b. USD 320,000

c. USD 380,000

d. USD 550,000
The correct answer is USD 380,000.

The approximate duration for a 10 year bond is 7.0. The volatility of the swap value over 10 years is calculated as follows: ? (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 ? (V) by 2.33, which gives approximately $380,000.
Incorrect
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content.pristine
Finance Junkie
Posts: 356
Joined: Wed Apr 11, 2012 11:26 am

Re: Swaps and Forex Risks Duration Related Query

Postby content.pristine » Mon Nov 12, 2012 2:18 pm

If the duration of a plain vanilla coupon bond is not given, you can assume it is equal to approximately 0.75*Maturity (from my experience).. Here 7 is an estimate..

8-)


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