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New Member
Hi David,

List of questions where "I don't get it" is growing as exam approaches :down: .( A bit disappointed about the Flash Quiz because there are no reliable set of questions to practice on which cover all the AIMS and since you are best teacher I have come across your questions would have really helped practice better .)
Anyway will attempt some of your 2007 questions. I did not understand this question in 2007 FRM practice exam .It's from Hull and i am supposed to know it and i don't .I understand it is a Var calculation and the square root rule has been used but why duration?

Hong Kong Shanghi Bank has entered into a repurchase agreement with a client where
the client will sell a 10-year US 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 US treasury 0.074%. The swap’s maximum potential exposure at a 99% confidence
level is closest to:
a. USD 320,000
b. USD 380,000
c. USD 550,000
d. USD 1,200,000
The approximate duration for a 10 year bond is 7.0. The volatility of the swap value over
10 years is calculated as follows:
σ(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 σ(V) by 2.33, which gives approximately

Reference: John Hull, Options, Futures, and Other Derivatives, 6th ed. Chapter 7.


David Harper CFA FRM

David Harper CFA FRM
Staff member
Hi Ravi,

("A bit disappointed about the Flash Quiz..." I agree and apologize. I didn't meet that goal, that i set. Thanks for stating your disappointment so nicely)

This is another flawed question.

First, we don't say the approximate duration of a bond is 7.0 precisely because, per the assigned Tuckman, duration varies with yield. The bond here is par, so we do know coupon = yield. Given that, this highest duration here is 9+ for a lower yield/lower coupon bond and could go down to 6 or less for high yield/high coupon. Ceteris paribus, higher yield implies lower duration.

Second, Hull Chapter 6 does not cover this (yield volatility). Technically, yield volatilty isn't under any assignment in FRM 2008

Okay, but given that,

The daily yield volatility is scaled by SQRT[10] to a a 10-day yield volatility, then to 99% confidence with 2.33. So what you have here is:

price * duration * worst expected yield change

it is just like
change in price = price * duration * 1%

but instead it is a worst expected change in price. If you divide each side by price/market value:
% change in market value = duration * worst expected % change in yield

Hope that helps,


New Member
I dont get this at all! I mean how do we know the duration is 7 anyway? The bond is at par can be assumed but there is no yield or coupon info. Is there a way to back out yield from yield vol? Am i missing something?

David Harper CFA FRM

David Harper CFA FRM
Staff member
skcd -

you are correct, it's a bad question. Given priced at par, we can infer coupon = yield; but duration may vary from ~6 (higher yield) ~9+ (lower yield). Can't infer from yield volatility - David