Abstract
Portfolio managers, traders, and risk managers need measures to quantify exposure to changes in interest rates. Two measures beyond duration that take into account interest rate exposure due to a change in the yield curve are partial durations and key rate durations. Par curve changes are used to compute partial durations, and the spot curve is used to compute key rate durations. Hence, in the case of partial durations, trading strategies and risk analysis are based on par yield changes and only indirectly on the spot curve; users of key rate durations base their strategies directly on the spot curve. Users of these sensitivity measures must understand the relationships between the two types of measures, as the results for the approaches often differ significantly. The analysis illustrates the differences between computing level, slope, and curvature durations using the par and the spot curve, and briefly examines the impact of these methodologies on implied forward rates.
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