Could anyone pls explain full valuation approach in a simplified manner. Thanks in advance
For each bond in your portfolio you compute the current value, then compute the value in whatever other scenarios you deem important (e.g., parallel yield curve shifts of ±25bp, ±50bp, ±100bp, steepening or flattening of the yield curve, widening or narrowing of spreads, and so on). That will involve estimating the cash flows in each scenario, estimating the appropriate discount rate for each scenario, and computing the present value of the cash flows. You may have to create a par curve or spot curve for each scenario, decide whether any options may be exercised and when, and so on. You then use these values to compute various statistics: modified duration, effective duration, key rate durations, spread duration, modified convexity, effective convexity, and so on.
Having done that for each bond, you then aggregate them into their portfolios and compute the portfolio values in each of the scenarios, and all of the statistics for the portfolios.
When I was at PIMCO we did this every night. We had 20 or 30 Sun workstations that we would network at the end of each day. All of the bonds that PIMCO owned were listed in a file; one workstation would grab the first bond, another the second, and so on. When a workstation would finish with its bond it would grab the next bond on the list, and so on until they were all done, which was usually just before the market opened the next morning.
Thank you sir
My pleasure.