This course explores the three-step process for assessing interest rate risk in a variety of financial instruments: risk identification, risk measurement, and risk management. The concept of duration is introduced and sample calculations are given for a number of different instruments, with a focus on applications and the interpretation of duration. The differences between modified duration and MacCauley duration are examined and discussed. This is followed by an introduction to DV01 (Dollar Value of a Basis Point). The differences between modified duration and DV01 are explained, and examples are given that show how different end users (e.g. derivatives dealers, traders, and portfolio managers) use these risks measures. An intuitive approach explaining how convexity is used as a risk measure is reinforced by actual calculations. These concepts are all brought together at the culmination of the course with examples showing how market practitioners use these measures to price securities, value positions, implement hedges and trading strategies, and evaluate the interest rate sensitivity of individual instruments and overall portfolios.

Objectives

By the end of the program the course participant will be able to:

• Describe the features of duration and convexity
• Calculate MacCauley duration, modified duration, DV01, and convexity
• Apply duration and DV01 in a variety of actual scenarios such as pricing, hedging applications and trading strategies
• Locate and interpret relevant Bloomberg screens and understand how market practitioners use them to analyze various instruments

People who require a better understanding of the risk process such as:

• Trading and sales personnel
• Supporting functions of fixed income and derivatives trading desks
• Asset/liability management analysts
• Risk Managers
• Auditors for capital markets activities