Hi David,
I was reading your Study Notes for Market Risk, and while reviewing the Key Rate chapter, I found something that bugged me. You wrote, on p. 34.
"The 2-year shift, for example, increased (“shocked up”) by 1 basis point (0.01%) the discount rate for all of the coupons up to year 10 (i.e., “each region of the yield curve is affected by a combination of its neighbors—the nearest key rates”). "
=> But in your example, the nearest neighbour to the 2-year key rate is the 5-year, not the 10-year key rate. So, why did you write that the discount rate for all coupons up to year 10 will be impacted?
Is there any reason for this?
Thanks,
trabala38
I was reading your Study Notes for Market Risk, and while reviewing the Key Rate chapter, I found something that bugged me. You wrote, on p. 34.
"The 2-year shift, for example, increased (“shocked up”) by 1 basis point (0.01%) the discount rate for all of the coupons up to year 10 (i.e., “each region of the yield curve is affected by a combination of its neighbors—the nearest key rates”). "
=> But in your example, the nearest neighbour to the 2-year key rate is the 5-year, not the 10-year key rate. So, why did you write that the discount rate for all coupons up to year 10 will be impacted?
Is there any reason for this?
Thanks,
trabala38
