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Category Archives: Asset Liability Management

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Interest Rate Risk: Duration, Macaulay Duration and Modified Duration

Duration is a measure of how rapidly the prices of interest sensitive securities change as the rate of interest changes (see application example in the ALM section). For example, if the duration of a security works out to 2 this means that for a 1% increase in interest rates the price of the instrument will decrease by 2%. Similarly, if the interest rates were to decrease by 1% the price of the security would increase by 2%.

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Asset Liability Management – Introducing ALM

Introduction Asset Liability Management (ALM) involves taking decisions and actions regarding assets and liabilities in an integrated manner in order to manage the business of the entity and meet the organization’s financial objectives. It is a continuing process that involves formulating, implementing, monitoring and revising

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Duration Convexity Asset Liability Management

Duration Convexity and Asset Liability Management What is the relationship between Duration, Convexity and Asset Liability management.  Let’s take a quick look Duration Duration is defined as interest rate sensitivity. For the purpose of this post modified duration is calculated by estimating the price change per

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Interest Rate Risk: Convexity approximation

Convexity Duration approximates the change in price of an instrument due to changes in the yield. However this approximation tends to work only for small changes in yield. For larger changes there will be a significant error term between the actual price change and that

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