Measuring yield curve risk, Financial Management

Assignment Help:

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.


Related Discussions:- Measuring yield curve risk

Historical differences in equity securities, Public Bourses The origin ...

Public Bourses The origin of this type of bourses can be found in the legislative work of Napoleon. These type of bourses are regulated by the government, brokers are appointed

Capital budgeting., definition and importance of capiyal budgeting

definition and importance of capiyal budgeting

Analyse and interpret company financial statements, INSTRUCTIONS Downl...

INSTRUCTIONS Download the 2011 Annual Report for Marks and Spencer PLC, from the link provided on Study Space. Review the Annual Report, paying particular attention to the Fin

Coefficient of determination, Coefficient of Determination As before, ...

Coefficient of Determination As before, Where, We can show that TSS = RSS + ESS We can also show that F = is an F distr

Generally accepted accpunting principle or gaap, Generally Accepted Accpunt...

Generally Accepted Accpunting Principle or GAAP The American Institute of Certified Public Accountant (AICPA) elaborates financial accounting theory and commonly accepted acco

What is working capital, What is working capital? Working capital compr...

What is working capital? Working capital comprise of the current assets of the firm.

Treasury coupon strips, Observed yield on strips can be used to const...

Observed yield on strips can be used to construct an actual spot rate curve, but it is not free from drawbacks. There are some problems with this; first, the liqu

Debt and coverage ratios, The ability of a firm to satisfy its debt o...

The ability of a firm to satisfy its debt obligations can be assessed using three sets of ratios: Short-term solvency ratios Capitalization

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd