Measuring yield curve risk, Financial Management

Rate duration can be defined as the sensitivity of the change in value to a particular change in spot rate. Every point in a spot rate curve has a rate duration. Therefore, instead of one rate duration, we will have a vector of durations representing each maturity on the spot rate curve. If all rates change by the same number of basis points then the total change in value would give us the duration of a security or portfolio to a parallel shift in rates.

Donald Chamber and Willard Carleton suggested this approach for the first time in 1988. They called it "Duration Vectors". After that, Robert Reitano came with "partial Durations," which is similar to the duration vectors approach. In 1992, Thomas Ho came up with a new version of this approach which gained much popularity. This approach concentrates on 11 key maturities of spot rate curve. These rate durations are called key rate durations. Key rate duration is measured for 3 month, 1-year, 2-year, 3-year, 5-year, 7-year, 10-year, 15-year, 20-year, 25-year, and 30-year maturities on the spot rate curve. The changes between any two rates are calculated using a linear approximation.

We can measure the impact of any type of yield curve by using key rate durations. A level shift can be measured by changing all key rates by same basis points. The impact of steepening of the yield curve can be found by decreasing the key rates at the short end of the yield curve and determining the positive changes in the portfolio value using the corresponding key rate durations and increasing the key rates at the long end of the yield curve, and determining the negative changes in the portfolio value using the corresponding key rate durations.

Posted Date: 9/10/2012 3:37:11 AM | Location : United States







Related Discussions:- Measuring yield curve risk, Assignment Help, Ask Question on Measuring yield curve risk, Get Answer, Expert's Help, Measuring yield curve risk Discussions

Write discussion on Measuring yield curve risk
Your posts are moderated
Related Questions
I need this in the next 24 hours urgently. If you can accept this, you must be meeting the deadline with strictly no delays or full payment refund is needed

If the EPS is Rs.5, dividend pay-out ratio is 50%, cost of equity is 20% and growth rate in the ROI is 15%. What is the value of the stock as per Gordon's Dividend Equalisation Mod

Factors of Importance of returns in any investment Importance of returns in any investment decision can be traced to the following factors: It enables investors to

Working of SEC The SEC supervises the main members in the securities world, including securities brokers and dealers, securities exchanges, investment advisors, and mutual fund

European Community (EC) An economic alliance, evaluated in 1957, designed to encourage trade and economic cooperation between its members.  The EC is also called the European

how control the steps

In this exercise you will construct efficient portfolios with 5 risky assets using Excel's non-linear optimization routing "Solver". The questions are designed to be sequential and

Accounting : Many people believe financial management only relates to bookkeeping and the establishment of accounting reports which reflect those transactions in the books.  Whi

this case has been framed in order to test the skills

Stock Exchange of Hong Kong Securities trading in Hong Kong started in 1866; however, the first formal stock market, the Association of Stockbrokers in Hong Kong, was establish