GARP 2016-FRR Exam - Topic 2 Question 6 Discussion

Actual exam question for GARP's 2016-FRR exam

Question #: 6
Topic #: 2

[All 2016-FRR Questions]

Sam has hedged a portfolio of bonds against a small parallel shift in the yield curve using the duration measure. What should Sam do to ensure that the portfolio is hedged against larger parallel shifts in the yield curve?

ATake positions to reduce the duration

BTake positions to increase the duration

CTake positions to make the convexity zero

DSince the portfolio is duration hedged Sam does not need to take additional positions.

Show Suggested Answer

Suggested Answer: C

by Gail at May 05, 2025, 09:18 PM

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Leanna

2 months ago

Wait, can you really hedge against larger shifts just by adjusting duration?

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Elfrieda

2 months ago

Convexity plays a big role here, so making it zero might not be smart.

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Cathern

2 months ago

Sam should definitely consider increasing the duration for larger shifts.

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Clorinda

3 months ago

I think reducing the duration is the way to go!

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Rima

3 months ago

If it's already hedged, why mess with it? Sounds risky!

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Pearlene

3 months ago

I think if the portfolio is already duration hedged, Sam might not need to do anything else, but I’m not completely confident about that.

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Marci

3 months ago

I practiced a similar question where we had to adjust for convexity. I feel like making convexity zero isn’t the right approach here.

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Sage

4 months ago

I’m not entirely sure, but I think increasing the duration could help with larger shifts. It seems counterintuitive, though.

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Dorthy

4 months ago

I remember that duration only measures the sensitivity to small shifts, so I think we might need to consider convexity for larger shifts.

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Truman

4 months ago

Ah I see, so to fully hedge the portfolio we need to take positions to make the convexity zero. That makes sense, I'll go with option C.

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Junita

4 months ago

The key here is that duration only protects against small parallel shifts. To hedge against larger shifts, we need to consider the portfolio's convexity.

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Gary

4 months ago

I'm a bit confused on this one. Isn't duration supposed to protect against parallel shifts? Why would we need to do more?

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Jaleesa

5 months ago

Okay, I think I know the answer here. Since the portfolio is already duration hedged, we need to look at the next level of protection - convexity.

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Richelle

5 months ago

Hmm, this seems like a tricky one. I'll need to think carefully about the relationship between duration and larger yield curve shifts.

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Nadine

8 months ago

You know, I once heard a joke about a bond trader who tried to hedge against yield curve shifts by building a wall around his portfolio. Didn't work out too well for him. Anyway, I'm going with option B too.

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Rickie

9 months ago

I think D is the correct answer, since the portfolio is already duration hedged.

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Verlene

9 months ago

Haha, I bet Sam wishes he could just make the convexity zero and call it a day! But that's not how it works, is it? Gotta go with option B to increase the duration.

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Rory

8 months ago

User 3: Making the convexity zero would be too easy, option B is the way to go.

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Clay

8 months ago

User 2: Yeah, that's the way to hedge against larger parallel shifts in the yield curve.

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Annamae

8 months ago

User 1: Sam should take positions to increase the duration.

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Vicente

9 months ago

I think Sam should take positions to make the convexity zero.

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Doug

9 months ago

Option D sounds right to me. If the portfolio is already duration hedged, Sam doesn't need to do anything else. No need to overcomplicate things.

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Nakita

8 months ago

User 2: Agreed, if the portfolio is already duration hedged, there's no need for additional positions.

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Tamera

8 months ago

User 1: I think option D is the best choice here.

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Michell

9 months ago

I think Sam should take positions to increase the duration. Larger shifts in the yield curve can have a bigger impact on the portfolio, so increasing the duration will help offset that.

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