FRM-FMP

anbu.edu
Finance Junkie
Posts: 205
Joined: Mon Feb 04, 2013 3:35 pm

FRM-FMP

Postby anbu.edu » Wed Apr 24, 2013 4:05 pm

Estimated price changes using only duration tend to:
A) overestimate the increase in price that occurs with a decrease in yield for large changes in yield.
B) underestimate the decrease in price that occurs with an increase in yield for large changes in yield.
C) underestimate the increase in price that occurs with a decrease in yield for large changes in yield.
D) overestimate the increase in price that occurs with a decrease in yield for small changes in yield.


Source schweser
i know that as duration Inc -Yield Inc -price Dec but i dont kno how to apply this in question. Please correct me if i am wrong

content.pristine
Finance Junkie
Posts: 356
Joined: Wed Apr 11, 2012 11:26 am

FRM-FMP

Postby content.pristine » Wed Apr 24, 2013 6:57 pm

You need to take Convexity of the bond into account.
I hope this hint can help you solve this question.

vnraghuveer
Good Student
Posts: 20
Joined: Mon Apr 08, 2013 1:36 pm

Postby vnraghuveer » Thu Apr 25, 2013 10:29 am

The total effect of yield curve change on price is ( -ΔY x duration) + (1/2 x Convexity x 〖(ΔY)〗^2 ).
If only duration is used it is simply ( -ΔY x duration), to which the convexity effect always adds a positive quantity. i.e., when, yield decreases, using only duration underestimates the increase in price(because it misses a positive quantity added by convexity effect) and if yield increases, using only duration overestimates the decrease in price


Return to “FRM Part I”



Disclaimer

Global Association of Risk Professionals, Inc. (GARP®) does not endorse, promote, review or warrant the accuracy of the products or services offered by EduPristine for FRM® related information, nor does it endorse any pass rates claimed by the provider. Further, GARP® is not responsible for any fees or costs paid by the user to EduPristine nor is GARP® responsible for any fees or costs of any person or entity providing any services to EduPristine Study Program. FRM®, GARP® and Global Association of Risk Professionals®, are trademarks owned by the Global Association of Risk Professionals, Inc

CFA Institute does not endorse, promote, or warrant the accuracy or quality of the products or services offered by EduPristine. CFA Institute, CFA®, Claritas® and Chartered Financial Analyst® are trademarks owned by CFA Institute.

Utmost care has been taken to ensure that there is no copyright violation or infringement in any of our content. Still, in case you feel that there is any copyright violation of any kind please send a mail to abuse@edupristine.com and we will rectify it.