Clarification on Taylor approximation?

[DavidM]

Hi David,

these are the Formula’s in FRM Handbook 2009(pg11):

%change in Price= -D(dy)+0.5xC(dy)^2
$change in Price=-DD(dy) +1/2xDC(dy)^2

*where DD = Dollar Duration= D*x Initial Price

*where DC= Dollar Convexity=C x Initial Price

Duration & Convexity estimate of New Price= Initial Price –DD(dy) + 0.5x DC(dy)^2 (If an increase in yield)

Duration & Convexity estimate of New Price= Initial Price +DD(dy) + 0.5x DC(dy)^2 (if there is a decrease in yield)

However, I saw this formula somewhere else:
%change in price= -D(dy)x100+ 0.5xC(dy)^2x100

I then tried to apply both to question/Exapmle 1.4 in the FRM Handbook(2009)-pg15.

*when I used the Handbooks formula I got answer A. When I used the formula above I got the correct answer of C. I know I am just missing a slight piece of logic here but what is it? I should be getting the same answer with both formulas right?

*Do we always use 100 what would happen if it was a 90 million dollar portfolio?
*Are we assuming a par value of 100, i’m confused!!

*I know it may be obvious but it’s just not clicking at the moment, I don’t want to take chances because I would hate a small factor like this to lead to me getting a question wrong.

Thanks,

David.

 

[DavidM]

lol, hahaha, Figured it out,SORRY guess I was just tired earlier!!!!!

 

[David Harper CFA FRM]

okay, good deal, i made an extended question out of it, since i thought it was useful, see:
http://forum.bionicturtle.com/viewthread/1864/

David

 

[[email protected]]

can someone help me with why the answer should be "D" in the attachment.

 

[David Harper CFA FRM]

I can't read it, it's got weird formatting ... although the source is shown in the watermark ... it's from one of the illegal pirates who helps to make our business difficult

David

 

[[email protected]]

Sorry. Material is not pirated. It is however from a different vendor. I was looking for a clear explanation for this. No problem.

 

[David Harper CFA FRM]

jfritz,

I was trying to help, i just can't read it ... mabye if you just copy the text?

(I know the vendor very well, he is the #1 pirate ... your document has his watermark ... you just may not be aware of it ... I realize the question itself is from another vendor, actually that typeface looks like Schweser notes. so just FYI, the notes may be Schweser but then they are re-sold by the pirate ... like he does to me ... so I slave 7 days/week all hours and he has a nice little business for zero effort)

David