One‐Factor Measures of Price Sensitivity |What is One Factor Measure| FRM VaR Model Video Lecture | Risk Management: An Essential Training - Management

simply learn your pace your place
financial risk manager frm / one of the
frm exam covers the fundamental tools
and techniques used in risk management
and the theories that underlie their use
one factor measures of price sensitivity
agenda the main agenda of our discussion
will be to analyze the various measures
for fixed income price sensitivity we
will begin by the concept of interest
rate factors and how the change in
interest rate affects the price two main
measures of sensitivity dv01
and duration will be discussed dv01
or the dollar value of the basis point
gives the absolute change in dollar
terms while duration gives the change in
relative terms we will use dv01
in hedging using fixed income
instruments we will also discuss the
concept of convexity or the nonlinear
price yield curve finally we will learn
how the curve exhibits negative
convexity for callable bonds measures of
fixed income price sensitivity
let us begin our discussion with the
usefulness of the measures of fixed
income price sensitivity it helps to
study the response of the hedging
instrument and the underlying on the
change in the interest rate it also
helps to determine the optimum
investment in case the expected changes
in the interest rate do occur this
measure can be useful in determining the
portfolio level of volatility and also
in helping firms to match the interest
rate sensitivity of assets and
liabilities interest rate factors are
random variables that affect the
interest rates along the yield curve in
a one factor approach the change in one
interest rate such as a change in the
ten-year rate will affect all the rates
in the yield curve this is also known as
the parallel change in the interest rate
curve dv01
dollar value of a basis point let us now
learn about some of the sensitivity
measures dv01 or the dollar value of a
basis point it is the absolute change in
the price gieux
so one basis point it change in the
yield mathematically it is the
difference in the price of the bond at
the yield to maturity separated by one
basis point as we know that the price
decreases with an interest in yield we
use a negative sign in the expression
this is an absolute measure