Fixed Income, step 3 of 6
FI3 Interest Rate Risk
Session timeline
Briefing
Trading40 min
Debrief
The case
A two-year bond and a ten-year bond trade together. Interest rates move the two by different amounts.
Objective
Take a position on rates and control the risk. Assessed on profit and loss.
What it shows
- Interest rate risk: a longer bond moves more for the same change in rates.
- Duration as the measure of that sensitivity.
- Hedging one bond with the other.
Watch out for
- Equal amounts of each bond, which is not equal risk.
- A hedge that is right for a small rate change and wrong for a large one.
- Holding the long bond for yield and being surprised by its price.
Who takes part
- Trader — every student. Trades SHORT, a two-year bond, and LONG, a ten-year bond.
Class size
Ten to forty students in one role.
Concepts
- Interest-rate risk
Roles
Trader
You trade a two-year bond, SHORT, and a ten-year bond, LONG.
- Assessed on profit and loss.
Instruments
| Ticker | Name | Market | Students can |
|---|---|---|---|
| SHORT | Two-year bond | Continuous trading | Trade it |
| LONG | Ten-year bond | Continuous trading | Trade it |
In the tracks
- Step 3 of 6 in Fixed IncomeShort and long bonds when rates move.