hello sir, I am not able to understand example 2 of core reading YC strategies. I have shared the full context as e.g. 2 is part of previous pages exhibition. Sir I have wasted alot of time on this but not clear. Can you send a audio file on this.
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In simple words, KRD is the sensitivity of the portfolio value to the change in a particular time period’s interest rate holding other rates constant.
KRD PVBP basically means for every 1bp change in interest rate of the time period of that KRD, what will be the change in the value of the portfolio? For example if the KRD of the 3rd year is 2, then for every 1% change in 3 year int rate, portfolio value will change by 2%. This means for every 1bp, portfolio value will change by 0.02% or 0.0002. Now, portfolio market value and par values are generally different. Say portfolio market value is 25000 and par value is 20000. Than, KRD PVBP = 0.0002*MV/Par = 0.0002*25000/200000 = 0.00025.
We are given these figures for all time periods. All we need to do now is calculate the change in portfolio value based on the change in interest rates given for each of the two strategies.
For example, 2 year rate change is -5bp. For portfolio 1, 2 year KRD PVBP is 0.0056. This is the change in portfolio value for every 1bp change in 2year interest rate but it is also divided by the par value. So, first thing we do is multiply 0.0056 by the par value to get the change in market value of portfolio for 1bp change in int rate. Now, we multiply this figure by 5 because the actual change in int rate has been of 5 bp. This is equal to 16.8. Therefore, market value of portfolio increases by 16.8 due to the 5bp fall in 2 yr int rate. We do this same exercise for all the time periods mentioned and sum the portfolio change values to get the total change in market value as a result of this int rate movement. And, we compare the magnitude of total change in the two portfolios to check which one provides more profit to us.
Even without doing the calculation, a glance at the PVBP numbers and the kind of int rate movement figures, we can understand that portfolio 1 is clearly more profitable. This is because: we know all the time period rates are falling and 30 year rate is rising. This means that excepting 30 year, a higher PVBP of all other time periods will give us more profit. And, a lower PVBP of the 30th year will lead to lesser loss. Portfolio 1’s PVBP schedule clearly satisfies both these needs. It’s PVBP numbers are generally higher than Portfolio 2’s and 30 year PVBP is lower than Portfolio 2’s. So, obviously portfolio 1 is going to benefit us more.