Explanation needed for Tuckman's Partial 01s exposure.

[Priyanka_Chandak23]

Hello,

I am confused between key rate exposures, bucket exposures and partial 01s with reference to multi factor risk metrics. Could someone please help me by summarising these topics? Also, highlight the key differences between them. Thanks a ton.

Priyanka.

 

[Matthew Graves]

I tend to think of Key Rate exposures in terms of Key Rate Durations. The principle is similar to that of Modified Duration except that the instead of moving the yield to obtain the price change you move a particular tenor point on the curve instead. It is quite common to bucket KRDs together to reduce the granularity and make interpretation easier.

Partial 01s are again similar but the difference is that the value is usually reported in an absolute amount (e.g. $135.7) rather than a relative % increase/decrease (as is the case with durations). Another distinction is that Partial 01 is a more generic term; it does not have to refer to Key Rates. Rather it is the effect on price of increasing one of the pricing input variables i.e. a partial derivative w.r.t. one of the variables.

Hope that helps.

 

[Priyanka_Chandak23]

Thanks a lot, Matthew.

I did understand your point, however I am not very experienced about how this works in the practical world. It would be immense help to me, if you could demonstrate the difference between the three by means of an example or a question with the corresponding solution. This is primarly to help me understand how would GARP test this in the exam.Thanks for your time.

Priyanka.

 

[uness_o7]

Hello @David Harper CFA FRM ,

Could you provide some clarification on this topic: difference between KR01 vs. partial PV01.
What I understood is that the KR01 is obtained by shifting par yields rather than "market" rates (e.g. 5y swap rate in the market, that can be above or bellow par).
- Am I correct? Is this the only difference?
- Could you illustrate what Tuckman means by fitted rate and refitting of the curve below?

If we could have both approaches applied on a single example to highlight the differences if would be very helpful.
Specifically, I have some trouble understanding the two statements below:
- "the partial ’01 with respect to a particular fitted rate is defined as the change in the value of the portfolio after a one-basis-point decline in that fitted rate and a refitting of the curve."
- "with key-rate shifts defined in terms of par yields, the key-rate profile of the 10-year bond, for example, would be its DV01 for the 10-year shift and zero for all other shifts only if the 10-year bond matured in exactly 10 years and were priced at exactly par. By contrast, in the case of partial ’01s, the shifts are defined precisely in terms of the fitting securities".

Thanks in advance!