VRM 13. Modeling Non-Parallel Term Structure Shifts and Hedging

Learning Objectives

1) Describe principal components analysis and explain its use in understanding term structure movements.

2) Define key rate exposures and know the characteristics of key rate exposure factors, including partial 01s and forward-bucket 01s.

3) Describe key-rate shift analysis.

4) Define, calculate, and interpret key rate ‘01 and key rate duration.

5) Compute the positions in hedging instruments necessary to hedge the key rate risks of a portfolio.

6) Relate key rates, partial 01s, and forward-bucket 01s and calculate the forward-bucket 01 for a shift in rates in one or more buckets.

7) Apply key rate and multi-factor analysis to estimating portfolio volatility.