C - CIA Duration Flashcards
CIA DURATION
Contrast 3 types of Duration
MACAULAY DURATION
=sum ( t x PV(CF) ) / sum (PV(CF))
MODIFIED DURATION
measures sensitivity to PV(CF) to change in interest rates
= macaulay duration / (1 + yield)
EFFECTIVE DURATION
measures sensitivity to PV(CF) to change in interest rates (similar to modified duration)
would be almost equal to modified duration if CF value does not change with interest rates.
If CF changes with Interest rates (for derivatives), effective duration with also capture sentitivity to this change
=( Fair Value if yield decline - Fair Value if yield rise ) / 2 * initial price * chg in yield
= (V- - V+) / ( 2 * V0 * delta Y)
CIA DURATION
DISADVANTAGE of
EFFECTIVE and MODIFIED Duration
they provide exact percentage change for small very change in interest rates, but are less accurate for large changes because relationship in chg in interest rate and chg in PV(CF) is not linear.
CIA DURATION
considerations on duration when performing calculation of interest rate risk margin in MCT
May use either EFFECTIVE or MODIFIED DURATION (not MACAULAY)
SAME methodology must apply to ALL assets and liabilities
SAME methodology must apply YoY
EFFECTIVE is THE REQUIRED MEASURE when interest changes may change expected CF