Hello everyone,
This formula is used to calculate % change in price given the % change in interest rates.
% change in price= -(dur)*(delta YTM)+(S)convexity*(delta YTM squared)
I don’t undestand what (S) means?
Sorry for the formula… I know its not good
This formula is from qbank asnwers.
Can somone explain what does (S) mean?
Regards,
David
The formula is:
%ΔP = -MD * ΔYTM + 1/2 * Conv * ΔYTM^2
I do not know what you mean with (S)? Note that ΔYTM needs to be inputted in decimals for the formula to work. Regards, Oscar
Thanks a lot Oscar
Perfectly explained by Oscar. Just an additional note that if you have studied calculus earlier, you would find out that this formula represents a Taylor expansion. The first term i.e. (-MD * ΔYTM) is the first-order expansion and the second term, i.e. ((1/2*Convexity*(ΔYTM^2)) is the second-order expansion. That’s why it is said that duration is the first derivative and convexity is the second derivative.
Just thought that the formula will be easier to relate in this way. Hope it was helpful!!
Regards,
Amruth