Study Notes: Modeling and Hedging Non-Parallel Term Structure Shifts

Topic Progress:

Chapter 13. Modeling and Hedging Non-Parallel Term Structure Shifts Study Notes contain 25 pages covering the following learning objectives:

* Describe and assess the major weakness attributable to single-factor approaches when hedging portfolios or implementing asset liability techniques.
* Describe the principal components analysis and explain its use in understanding term structure movements.*
* Define key rate exposures and know the characteristics of key rate exposure factors including partial ‘01s and forward-bucket ‘01s.
* Describe key-rate shift analysis.
* Define, calculate, and interpret key rate ‘01 and key rate duration.
* Describe the key rate exposure technique in multi-factor hedging applications; summarize its advantages and disadvantages.
* Calculate the key rate exposures for a given security, and compute the appropriate hedging positions given a specific key rate exposure profile.
* 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.
* Apply key rate and multi-factor analysis to estimating portfolio volatility.

After reviewing the notes, you will be able to apply what you learned with practice questions.

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