Why can’t it be portfolio A? I thought as long BPV A > or = to BPV L, that’s fine.
Second requirement is lower convexity to reduce structural risk.
The goal is to match the bvp and not exceed it.
Conceptually if rates rise and you have a much higher asset BPV than liability bpv, our assets will lose incrementally more than the liabilities. Even if the BPV of port A was less than BPV L (say 170,000) that would still be preferable to a high BPV of 182,160.
Unrelated, but how is mock B? Is it worth the time/are the questions of proper length and test solid concepts?
But what about convexity? I would have thought its choosing the lower convexity statistic would be more important.
For multiple liabilities:
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BPV (A) > = BPV (L)
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Lower convexity portfolio should be chose, subject to asset convexity higher than liabilities
I felt mock B was poorly written.
I did not even know there was a mock B.
The goal is to match the BPV.
If you can’t match it exactly (which you’ll never do in real life), it doesn’t matter whether you’re a little bit high or a little bit low. Close enough is close enough, either way.