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*Learning objective: Describe the method of mapping forwards, forward rate agreements, interest rate swaps, and options.*

**Questions:**

717.1. A portfolio manager evaluates the risk of the following two-bond portfolio:

We assume that specific risk is negligible and that the volatility of changes in market yields is 50 basis points. Under these conditions, which is

**nearest**to the volatility of the portfolio value? (note: variation on Jorion's EOC question 11.8)

a. $1,065

b. $3,230

c. $4,856

d. $9,700

717.2. In regard to value at risk (VaR) mapping, each of the following statements is true

**EXCEPT**which is false?

a. A forward currency position has three major risk factors: the spot price and two interest rates

b. A consumption commodity forward contract is more likely to be directly mapped the commodity's volatile forward price than an investment commodity forward

c. A forward rate agreement can be mapped to two risk factors: a long position in a zero-coupon bond (or bill) plus a short position in a zero-coupon bond (or bill)

d. Because an interest rate swap is a bilateral contract, it cannot be effectively mapped to primitive risk factors and simulation must be used to compute a diversified VaR

717.3. In January, Stacy the Risk Analyst has mapped a large and LONG position in call options with the following profile:

- Ratio of spot price to strike price, S/K: Approximately 1.0
- Implied volatility: ~ 23.0% per annum
- Time to expiration: Six months (mature in July)
- Risk-free rate assumption: 1.50%

**CHANGES**to her mapping is MOST likely?

a. She adds the risk-free interest rate (rho) as a risk factor because expiration is now virtually certain

b. She adds gamma as a risk factor because the first-order linear approximation has become insufficient

c. She adds vega as a risk factor which was omitted at long maturities but is more relevant at short maturities

d. She adds delta as a risk factor which had a low profile at longer terms but, for ATM options, becomes more relevant as maturity approaches

**Answers here:**

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