Added support for Modified Duration weighted Key Rate Risk
In Trade Blotter, traders can access Key Rate Risk (Modified Duration) which is a modified duration-weighted DV01 hedge.
Once traders enter their positions, and check “X” column, they can click on “Calculation” – “Key Risk” – “Key Risk (Modified Duration)”.
Example: $100MM T 1.25 31-Aug-2024 bond with key rate buckets 2, 5, 10.
The key rate cure has 3 fitting points, CT2 (MD = 1.994), CT5 (MD = 4.961), and CT10 (MD = 9.638). Each bucket’s “end date” is the modified duration of the corresponding treasury.
$100MM T 1.25 31-Aug-2024 has dv01 = 43,250 and MD = 4.142. The total dv01 is then modified duration-weight allocated to 2 and 5 buckets as of market date 5/27/2020.
CT2 Key Risk = (CT5 MD - MD of Bond) / (CT5 MD – CT2 MD) * DV01 = (4.961 – 4.142) / (4.961 – 1.994) * 43250
= 11,939
CT5 Key Risk = (MD of Bond – CT2 MD) / (CT5 MD – CT2 MD) * DV01 = (4.142 – 2) / (4.961 – 1.994) * 43250
= 31,311
Note: Applicable for bond and bond futures, bond future uses its CTD to get modified duration