Non-Parallel Term Structure Hedging and Binomial Trees

Free GARP FRM Part I lesson in Valuation and Risk Models. 23 min read, ~3,403 words.

Principal components analysis (PCA) of U.S. Treasury daily yield changes finds three components (level, slope, curvature) explaining 95%+ of variance, with level alone dominating at 80-85%. Key-rate duration (KRD) measures price sensitivity to a shift at one maturity, holding adjacent rates fixed; the sum of KRDs equals total modified duration...