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Interest Rate Swaps (Key Rate Duration)

Thread starter #1
I am trying to understand why KRD levels are most sensitive closer to the maturity of a pay-fixed swap.

Let’s say for example, I have a 10-year vanilla pay-fixed swap. The KRD is highest at the 10yr, around 4.54. One side of the transaction is fixed and the swap is essentially a bet on LIBOR, shouldn’t the KRD be highest (most sensitive) against the 3MO LIBOR rate? Both parties are just exchanging interest payments each period, so why should the KRD be the highest at 10? I understand that the longer the maturity is, the longer the duration, but I am having trouble incorporating that concept in this example because if 3MOLIBOR goes up or down, the value of the swap changes drastically… so why benchmark off other rates?

In this example, if KRD is highest at 10year point, does this mean I should be looking at the 10 year swap rate to see how much it is fluctuating – because that fluctuation will help me determine KRD @ 10?
 

Nicole Seaman

Chief Admin Officer
Staff member
Subscriber
#2
I am trying to understand why KRD levels are most sensitive closer to the maturity of a pay-fixed swap.

Let’s say for example, I have a 10-year vanilla pay-fixed swap. The KRD is highest at the 10yr, around 4.54. One side of the transaction is fixed and the swap is essentially a bet on LIBOR, shouldn’t the KRD be highest (most sensitive) against the 3MO LIBOR rate? Both parties are just exchanging interest payments each period, so why should the KRD be the highest at 10? I understand that the longer the maturity is, the longer the duration, but I am having trouble incorporating that concept in this example because if 3MOLIBOR goes up or down, the value of the swap changes drastically… so why benchmark off other rates?

In this example, if KRD is highest at 10year point, does this mean I should be looking at the 10 year swap rate to see how much it is fluctuating – because that fluctuation will help me determine KRD @ 10?
Hello @omar72787

If you use the search function here in the forum, there are MANY threads that come up regarding key rate duration. We always ask that you search the forum before asking a question, as our forum has over 10 years of discussion threads, which means that you will most likely find your answer by doing a simple search. This keeps our forum organized, and prevents David from having to answer the same question many times. If you do not find what you are looking for, we are always happy to help, but I think you will find that by looking through the current threads in the forum, you will find an answer to your question. We have a good blog post here with tips on using our forum: https://www.bionicturtle.com/utilizing-the-bionic-turtle-frm-forum/. :)

Thank you,

Nicole
 

Nicole Seaman

Chief Admin Officer
Staff member
Subscriber
#4
Sorry about that Nicole. I started looking around the forum for additional help but was still having trouble finding my answer.
Hello @flawless21
No problem! We just like to make sure that our members are aware of our search function in the upper right corner of the forum before asking a question so there is not a lot of duplicate posts. If you did not find an answer by using the search function, I'm sure someone here in the forum can answer your question.

Thank you,

Nicole
 
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