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
Account balance - Inherent risk At account balance / class of transaction level Balances susceptible to misstatement. History of errors. Complexity of transac

State a process for benchmarking 1.  Gain senior management commitment to establish benchmarking as a process within the organisation and educate stakeholders and staff about t


How to get cost differential when 100% done by a single party only.

RWE Enterprises is a small manufacturer in Adelaide South Australia, feed suppliments for cattle. New production line NPV, Payback period and discounted payback period

An introduction to the principles of banking and finance It covers a broad variety of topics using an economic perspective and aims to give a general background to any student

Q. What are the misstatements? A Misstatement is Inconsequential - If a reasonable person would determine after considering the possibility of further undetected misstatement

The calculations for the cash flows Actual amount of cash paid or received during the period needs to be established. This can get quite  tricky  as  there  would be  accruals

The price volatility properties of bonds with the help of the graph of the price/yield relationship. Let us now, with the help of a graph, illustrate how duration estim

Determine about the Shareholders Shareholders, being the owners of the company, elect board of directors and vote on major issues that affect functioning and long term plans of