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Further Questions VL2-2
Further Questions VL2-2
Further Questions VL2-2
Q 14.15
Pn vi
a) Equation 9.1 States D = − B1 ∆B
∆y and 9.3 states D = i=1 ti B , we know
Pn Pn
B = i=1 CFi e−yti so ∂Y∂B
= − i=1 ti CFi e−yti plug the derivate into 9.1 and
we get
n
! n
1 ∆B 1 X
−yti
X v
i
D=− = − − ti CFi e = ti
B ∆y B i=1 i=1
B
Q 14.17
a) For zero coupon bondsPnthe duration is equal to the maturity of the bond, you
can see this from D = i=1 ti vBi since vi = 0 ∀ i < n and vi = B for i = n. So
2000e−0.1 6000e−0.1·10
the duration of Portfolio A is 2000e−0.1 +6000e−0.1·10 ·1+ 2000e−0.1 +6000e−0.1·10 ·10 =
5. 95 years which is also the duration of portfolio B.
b) Value before change for portfolio A is 2000e−0.1 + 6000e−0.1·10 = 4017.
0 and for B 5000e−0.1·5.95 = 2757. 8. Value after change for A is 2000e−0.101 +
6000e−0.101·10 = 3993. 2 and a precentage change of 3993.2−4017 4017 = −0.5 92%.
Value after change for B is 5000e−0.101·5.95 = 2741. 5 and the percentage change
is 2741.5−2757.8
2757.8 = −0.5 91% .(Change is not exactly same in A and B because of
round off error and to some degree different convexity).
c) Value after change for A is 2000e−0.15 + 6000e−0.15·10 = 3060. 2 and a pre-
centage change of 3060.2−4017
4017 = −23.8 Value after change for B is 5000e−0.15·5.95 =
2048. 2 and the percentage change is 2048.2757.8
2−2757.8
= −25.7% . The take away
here is that duration is not a good risk measure for large changes (it is similar
to delta), portfolio B has larger convexity and therefore changes more in value
than portfolio A.
1
Q 14.19
See Python Notebook.