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DURATION SENSITIVITY AND PLA IN BONDS
Title: DURATION SENSITIVITY AND PLA IN BONDS
Category: Law & Government / Government & Politics
Details: Words: 742 | Pages: 3.2 (approximately 235 words/page)
DURATION SENSITIVITY AND PLA IN BONDS
Subject: DURATION, SENSITIVITY AND PLA IN BONDS
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I would like to help some of you with a general explanation on how to
calculate sensitivity and PLA in bonds. Many of you may know these
issues,
but I prefered to send a general message. Please disregard this CM if
this
is your case.
The market factor (what generates the risk) in a bond, is the yield
(the interest rate embedded in the investment). This means that …showed first 75 words of 742 total…
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…showed last 75 words of 742 total…volatility of the yield is 60
bps
(0.6%) and the defeasance period is 4 days
PS = 96.000 * 2.01 * 0.01 = 30 (each time the yield changes 1%, the
position changes 30)
PLA = 1930 * 0.6 * square root of 4
PLA = 1930 * 1.2 = 16 (if the yield moves 1,20 % in the wrong
direction,
the potential loss would be 16)
As you see, the PLA for both examples is the same. By changing the unit
shift, we only change the way we report sensitivity, but the risk of the
whole transaction (PLA) should be the same.
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