Why is it that we only take eff spread duration as negative here but in other calculations its positive?
Excess spread = (t x S0) - (effsdur x change in spread) - (pod x lgd)
Would it be wrong if the question comes for a HPR of 1 year, and to take effsdur as negative inside the bracket?
Spread duration is positive. The price effect is negative.
Note, too, that the last term should be (t × pod × lgd). The curriculum has it wrong.
Can you please explain the first statement further? For instance, when we calculate the price effect using modified duration, we use -MD x change in yield. Why don’t we apply the same for excess spread?
Also thank you for the note!
Same thing here: the price effect is −SD × change in spread. In your formula, the negative sign is in front of the parenthesis.
Got it, thank you!
My pleasure.
