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

Absolute performance standard, Absolute Performance Standard is a method of...

Absolute Performance Standard is a method of measuring an organization's development and how effective and efficient it is at operating its business. The absolute performance stand

Explain how bank eliminate the currency exposure, Banks find it essential t...

Banks find it essential to accommodate their client’s requirements to buy or sell foreign exchange forward, in many examples for hedging purposes.  How can the bank eliminate the c

Time value of money, Can you help me out on the Time value of money????? ...

Can you help me out on the Time value of money????? I need urgent help on this topic...

Define the conversion ratio and conversion value, Define the following term...

Define the following terms that relate to a convertible bond:  conversion ratio, conversion value, and straight bond value. The term conversion ratio is the number of shares of c

Acquisition planning and strategy, A c quisition Planning and Strategy ...

A c quisition Planning and Strategy In the previous section, we discussed about the constraints to successful merger integration. In this section, we will learn how to plan a

Calculate the maximum price of machine, Silvana Zhang of Sajjad Jafri & Geo...

Silvana Zhang of Sajjad Jafri & Geopeng Li Limited is considering purchasing a new widget making machine. She would like to know the maximum price she should pay for the new machin

Bonds/debentures, Bond are formal certificates issued by the companie...

Bond are formal certificates issued by the companies or government agencies acknowledging the indebtedness. To the investors, they are proofs of investment. In th

Example on walters dividend model, Q. Example on Walters dividend model? ...

Q. Example on Walters dividend model? Example: - The following information is obtainable in respect of a firm: Capitalisation Rate (Ke)                     = 10% Earning

WACC, Keys Printing plans to issue a $1,000 par value, 10-year noncallable ...

Keys Printing plans to issue a $1,000 par value, 10-year noncallable bond with a 5.00% coupon, paid semiannually. It should sell at par. The company''''s marginal tax rate is 40.00

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