Key rate shift: calculation

Yesterday I talked about the conceptual difference between traditional duration and key rate shift; i.e., duration assumes all rates shift in parallel, but a key rate shift assumes only a local key rate shift (and neighboring rates). In this screencast, I show an actual key rate duration calculation. The key rate duration is the approximate percentage change in bond price given a 1% change in the key rate (as opposed to the whole term structure or yield curve! That's the difference). This is a simple example that will setup the more elaborate key rate shift technique illustrated by Tuckman, which is relevant to FRM candidates.

Category:

Education

Tags:

• Bond
• duration
• yield

[bionicturtledotcom]

Thanks. He gets them in the same way he computed KR01 for the mortgage bond; each KR01 is the change in dollar price of the hedging instrument given the shock to the specific key rate. But I disagree with zeros in the matrix, I think they should all have values.

[sumitsage]

This post is helpful. I am though having doubt on hedging using key rate exposure as shown on page 138 in Tuckman's book. Specifically how are the figures of 0.01881, 0.00122, 0.4375 etc arrived at. Grateful if you can ellaborate.