Outlines the development of duration as a risk management tool for fixed income securities, shows how it is calculated and gives examples to illustrate its use in assessing risk exposure and immunizing bond portfolio returns against interest rate risk. Cites research confirming its effectiveness and goes on to discuss the application of duration gaps to balance sheet hedging (macrohedging) by financial institutions and the New Zealand government. Considers some complications of duration analysis due to convexity, stochastic process risk and default risk.
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