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#1
09-12-2005, 02:01 PM
 SSS Member Join Date: May 2005 Posts: 62
Duration of Swaps - PRM Exam

Can anyone explain how the durations 4.36 and 7.66 are calculated in this question from a PRM practice exam?

A trader executes a \$200 million 5-year pay fixed swap with one client and a \$100 million 10-year receive fixed swap with another client shortly afterwards. Assuming that the 5-year rate is 4.75 percent and 10-year rate is 5.15 percent and that all contracts are transacted at par, how can the trader hedge his net delta position?

a.Sell 424 Eurodollar contracts.

c.Sell 6,552 Eurodollar contracts.

Explanation:

Given the rates of 4.75% and 5.15%, the dollar durations of the 5-year and 10-year par swaps are approximately 4.36 and 7.66. Therefore, the trader has the following DVBP positions
First swap DVBP = \$200 million x 4.36 x 0.0001 = \$87,200.
Second swap DVBP = \$100 million x 7.66 x 0.0001 = \$-76,600.
Net DVBP position = 87,200 + -76,600 = 10,600.

Since the trader has a short position, he needs to buy the futures. The DVBP or a Eurodollar future is \$25. Therefore the number of contracts required = 10,600 / 25 = 424.
#2
09-12-2005, 02:10 PM
 WWSituation Member SOA Join Date: Sep 2001 Location: philadelphia, pa Favorite beer: Parabola Posts: 2,836

It looks like the explanation is using a rule of thumb. You can do the same by looking at the swaps as 5 and 7 year bonds and estimating the durations off your calculator.
__________________
Quote:
 Originally Posted by Duffer We, the actuarial profession, did several things badly. 1. Pandering - we marketed ourselves as finding clever ways to give the public pension sponsors something for nothing 2. Ignored consequences - we found clever ways to allow politicians to ignore the true costs of benefit increases, like negative amortization of losses 3. Low standards of measurement - GASB had the most simple-minded of standards, and is now only going half-way to raise the standard.
#3
09-12-2005, 02:26 PM
 SSS Member Join Date: May 2005 Posts: 62

Thanks! That helps, I didn't think to treat the swaps as bonds
#4
09-12-2005, 02:58 PM
 WWSituation Member SOA Join Date: Sep 2001 Location: philadelphia, pa Favorite beer: Parabola Posts: 2,836

Curious: What is your regiment for the PRM exams?

I ask because I'm taking the FRM in November and I wonder if they aren't close to the same curriculum. It would be hard to believe that the material could be drasticaly different.

Do you take all of the modules in 1 shot?
__________________
Quote:
 Originally Posted by Duffer We, the actuarial profession, did several things badly. 1. Pandering - we marketed ourselves as finding clever ways to give the public pension sponsors something for nothing 2. Ignored consequences - we found clever ways to allow politicians to ignore the true costs of benefit increases, like negative amortization of losses 3. Low standards of measurement - GASB had the most simple-minded of standards, and is now only going half-way to raise the standard.
#5
09-12-2005, 03:45 PM
 SSS Member Join Date: May 2005 Posts: 62

My plan is to take the 4 exams separately... just because it's easier to study one at a time.
To prepare I'm reading the Handbook that the PRM publishes. It's a lot of reading and it's hard to know what to focus on. I'm just hoping that the practice exams are a good indication of what to expect.
The PRM exams are offered all the time, so you can chose when to take each exam.

From what I've heard, the FRM syllabus is very similar. Is it just one exam? Did they provide reading material?
#6
09-12-2005, 04:00 PM
 WWSituation Member SOA Join Date: Sep 2001 Location: philadelphia, pa Favorite beer: Parabola Posts: 2,836

The FRM exam is one exam. They provide readings but the big plus is that Schweser put together a study manual, and I had good success with Schweser for the CFA exams.

Best of luck to you.
__________________
Quote:
 Originally Posted by Duffer We, the actuarial profession, did several things badly. 1. Pandering - we marketed ourselves as finding clever ways to give the public pension sponsors something for nothing 2. Ignored consequences - we found clever ways to allow politicians to ignore the true costs of benefit increases, like negative amortization of losses 3. Low standards of measurement - GASB had the most simple-minded of standards, and is now only going half-way to raise the standard.

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