2016-FRR Exam Dumps | PV01 is a method of describing interest rate risk. Which one of the following is a specific weakness

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Financial Risk and Regulation (FRR) Series
GARP.2016-FRR.v2025-06-21.q161
Question 93

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Question 93/161

PV01 is a method of describing interest rate risk. Which one of the following is a specific weakness of PV01?

A. PV01 overestimates convexity risk

B. PV01 is not very good at describing value change due to large changes in interest rates

C. PV01 underestimates the effect of small changes in interest rates

D. PV01 requires a large number of calculations to produce a reasonable estimate of the effect of interest rate changes

Correct Answer: B

Comprehensive and Detailed In-Depth Explanation:
PV01 (Present Value of a 1 basis point change) measures the change in a portfolio's value for a 1 bp (0.01%) shift in interest rates, assuming a linear relationship. Its weakness is that it fails to capture non-linear effects (e.
g., convexity) for large interest rate changes, where the actual value change deviates from the linear approximation. Option A is incorrect as PV01 ignores convexity, not overestimates it. Option C is false as PV01 is accurate for small changes. Option D is incorrect as PV01 is computationally simple. GARP's FRR confirms this limitation in interest rate risk analysis.
Reference:GARP FRR Study Notes, Market Risk Section; BCBS, "Principles for the Management and Supervision of Interest Rate Risk," July 2004, para. 40-45.
Below is the third batch of 10 questions (363-372) formatted as requested, with verified answers and detailed explanations based on official Financial Risk and Regulation (FRR) documents, primarily referencing Basel frameworks from the Global Association of Risk Professionals (GARP) and Basel Committee on Banking Supervision (BCBS) guidelines. Typographical errors have been corrected, and answers have been double- checked for accuracy.

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