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
Time Series and Demand Forecasting   The process of budgeting in many organizations starts with a forecast of demand for the products in the forthcoming year and the sales f

Question 1 Describe the types of investment decisions Question 2 List the main features of ordinary shares Question 3 List the assumptions of Walter's dividend model. Ex

Info on applying CVP to product mix limiting factors

Q. Computation of Value of the Firm? Computation of Value of the Firm (V) & Overall Cost of Capital:- NI                    = EBIT - Interest = 50,000 - 20,000 = 30,000

How could we project exchange rates in order to be able to forecast exchange differences? If someone knew how to predict exchange rates, they would be a millionaire and would n

discuss three approaches to short-term financing

Financial Analysis Project: At the beginning of 2009, CanGo purchased the online gaming company. This purchase was for cash, paid for through the proceeds of the

R eceipt of bids and bid opening We discussed how to prepare the bids and to publish them in the earlier sub section. Now let us see how to receive and open bids. To receiv

The management of Nelson plc wish to estimate their firm’s equity beta. Nelson has had a stock market quotation for only two months and the financial management feels that it would

What is a security? The Securities are claims on financial assets.  They can be explained as "claim checks" that give their owners the right to obtain funds in the future.  Sec