N1569 Workshop 5
1. Sketch the cash flows for:
(i) Receipt of a 5-year interest-only (not interest + pay-down) loan of $10m with a fixed annual interest payment of 4%.
(ii) Purchase of a 3-year bond with a coupon of 5% paid annually.
2. You have a cash flow of $6m at 7 years, when the 7-year interest rate is 5% with a volatility of 45 bps. You want to map this to two vertices: the 5-year interest rate, which is 4% with a volatility of 50bps; and the 10-year rate which is 6% with a volatility of 40bps. The correlation between the 10-year and 5-year interest rates is 0.75. Use the appropriate Excel spreadsheet to:
(i) Find the PV (in $m) and the PV01 (in $) of the original cash flow.
(ii) How much of this PV is mapped to each vertex, in order to keep PV constant and to keep the volatility of the mapped cash flow the same as the volatility of the unmapped cash flow?
(iii) Calculate the PV01 of the mapped cash flow at each vertex.
3. Use Excel AI and the file BoE spot curve.xlsx to reproduce the time series plot shown on slide 30.
4. Use the Excel Workbook 5 to calculate normal and historical VaR for a gilts port- folio which has equal PV01 at all maturities, for different significance levels and holding periods.