Multi-Factor Risk Measurement and Hedging of Bond Portfolios

[cdbsmith]

Hi David,

First, I have no practical experience with bonds or bond portfolios. So, in reading Tuckman Chapter 5 (Multi-factor Risk Metrics and Hedges), I am totally confused on the portion where he explains how to measure and hedge against key rate exposures. I am referring to pages 133 & 134 of the "Valuations" study notes doc. The pages respond to AIM statement "Calculate the key rate exposures for a given security, and compute the appropriate hedging positions given a specific key rate exposure profile."

For example, I am having trouble understanding how to determine which values to hedge and what the numerators and denominators should be.

Can you help clarify this for me?

Thanks,

Charles

 

[cdbsmith]

David,

I have attached the specific pages that I am having trouble with.

Thanks,

Charles

 

[David Harper CFA FRM]

Hi Charles, okay thanks (the notes are summaries of the assigned Tuckman, so I'll assume the underlying Tuckman chapter is similarly challenging? I think it is ...). I will get to your question as soon as I can, it will be useful anyways (to provide more beef to the notes here), but i won't be able to immediately, FYI: we have more videos still to produce before the exam next month and the support burden is currently heavy (and your sort of question for general clarification is time-consuming). No worries, I think your question is good! I assume you've seen the associated practice questions which sort of tease out this topic with some illustrated example(s)? Thanks,

 

[cdbsmith]

Thanks David!

I realize my question is pretty general, but that's only because I'm too confused to be more specific. I certainly appreciate your current workload with the exam right "around the corner".

I haven't looked at the related practice questions, but I will do that now. Maybe that will help to clarify some of my concerns. Otherwise, I will await your response.

Thanks again,

Charles