Based on Exhibit 1 , for investors that purchased 10-year US notes, the spread widening in basis points that will wipe out the additional yield gained for a quarter is closest to:

A . 6.03 in Singapore.

B . 8.09 in Japan.

C . 13.48 in the United Kingdom.

Th e following information relates to Questions 23–28 and is based on “Fixed-Income Portfolio Management—Part I” and this chapter Salvatore Choo, the Chief Investment Offi cer at European Pension Fund (EPF), wishes to maintain the fi xed-income portfolio’s active management but recognizes that the portfolio must remain fully funded. Th e portfolio is run by World Asset Management, where Jimmy Ferragamo, a risk manager, is analyzing the portfolio (shown in Exhibit 1), whose benchmark has a duration of 5.6. None of the bonds in the portfolio have embedded options. However, EPF’s liability has a duration of 10.2, creating an asset liability mismatch for the pension fund.

EXHIBIT 1 EPF Portfolio Maturity Market Value (000) Duration 2-year bond €421,000 1.8 5-year bond €1,101,000 4.8 10-year bond €1,540,000 8.4 Total €3,062,000 6.2 Choo is utilizing a contingent immunization (CI) approach to achieve better returns for the fund, so by his understanding of CI, he can use the entire fi xed-income portfolio for active management until the portfolio drops below the safety net level or the terminal value.

Ferragamo runs the following risk statistics on the EPF portfolio to ensure that they are not outside the EPF trustee guidelines. He has the following comment:

“Th e portfolio value at risk, as opposed to shortfall risk and standard deviation, determines the most the portfolio can lose in any month.”

Ferragamo has collected the following data on the bund (German Bond) future, which has a conversion factor of 1.1, and the cheapest to deliver bond is priced at €100,000 and has a duration of 8.2.

In addition to his CIO responsibilities, Choo is also responsible for managing the funding liabilities for a new wing at the local hospital, which is currently fully funded utilizing a standard immunization approach with noncallable bonds. However, he is concerned about the various risks associated with the liabilities including interest rate risk, contingent claim risk, and cap risk.

Choo is interested in using cash fl ow matching rather than immunization to fund a liability for the new wing. Th e liability is denominated in euros and will be a lump sum payment in fi ve years. Th e term structure of interest rates is currently a steep upward-sloping yield curve.