medium · FRM Part 2 Market Risk
In the context of fixed-income VaR mapping, why is 'Cash-Flow Mapping' superior to 'Duration Mapping' for a barbell portfolio?
- Cash-flow mapping is simpler to calculate as it only requires the Macaulay duration of the portfolio.
- Duration mapping overstates risk by ignoring the principal payments of the bonds.
- Cash-flow mapping ignores correlations between different points on the yield curve, making it more conservative.
- Duration mapping is a one-factor model that cannot detect non-parallel shifts like steepening or curvature changes.
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