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shocking curves
If you were asked to shock the curve, by increasing rates 100 b.p., how would you interpret this? Would you interpret it as increasing the forward rates, or would you interpret it as increasing the zero rates?If you would answer the latter, would your answer change if I asked you to increase the rate at a point on the curve by 100 b.p.?
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- anfieldred
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shocking curves
i would use the par swap curve in both cases. although risk can be expressed in terms of zero rates it is more usual to use par rates. when traders talk about dv01 they are speaking about risk to the par curve as this is the traded instrument.
shocking curves
So, what does it mean if the 6 year par rate goes up a percent, but all other par rates remains constant? I would have thought that this didn't make sense? (ie would force forward rates just before 6 years to be infinitely high, and after to be infinitely low).
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- johnself11
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shocking curves
the utility of perturbing just one point in a yield curve (in your example, the 6y) is to determine the "key rate duration" of that point.... swap traders manage their overall interest rate risk as a porfolio of all the points which make up the curve, so to get the risk of a swap they consecutively move each yield curve element and determine the the swap value change.... the series of these values of "DV01's" represents the overall "bucketed" risk of the swap, and all swaps in their portfolio are added up in each maturity risk bucket and managed as a whole.....