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

Describe personal financial management., Gary and Joyce Yau, both 30, last ...

Gary and Joyce Yau, both 30, last month bought their dream house in London, Ontario. The purchase price was $450,000 plus addition fees such as taxes, legal fees, administration fe

What do you meant by negative externalities, Question 1: i) Is ther...

Question 1: i) Is there a stable and inverse link between unemployment and inflation? ii) The government announces that expansionary policies will be enacted in a view

Margining system, Margining System: Indian capital markets have finally...

Margining System: Indian capital markets have finally acquired an international flavor with the market-wide rolling settlement coming into place on both the premier exchanges (

Advantage of weighted average cost of capital, Advantage of Weighted Averag...

Advantage of Weighted Average Cost of capital 1) Straight Forward and logical: Weighted Average ost of Capital defines the oveall cost of capital as the sum of the cost of t

Partnership, Par tnership A legally authorized business form in wh...

Par tnership A legally authorized business form in which two or more partners are co-owners, sharing profits, losses, and liabilities related with the business they own.

Convertible bonds, Basics of Convertible Bonds The provision of convers...

Basics of Convertible Bonds The provision of conversion in a corporate bond entitles the bondholder the right to convert the bond into a predetermined number of shares of commo

Show the graphic presentation of net income approach, Q. Show the Graphic P...

Q. Show the Graphic Presentation of Net Income Approach? Graphic Presentation of Net Income Approach: - Net Income approach is described graphically as follows: In the

WACC, WHAT ARE THE MAIN VIEWS OF WACC PREVALENT IN THE FINANCIAL MANAGEMENT...

WHAT ARE THE MAIN VIEWS OF WACC PREVALENT IN THE FINANCIAL MANAGEMENT LITERATURE

Find the minimum earnings, Milan Corporation is interested in buying a mach...

Milan Corporation is interested in buying a machine that will cost $50,000, and it will depreciate it on straight-line basis over a 5-year period. The machine is expected to last f

Price Earnings, what is the relationship between industry pe and comapny''s...

what is the relationship between industry pe and comapny''s pe?

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