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Subject: DURATION, SENSITIVITY AND PLA IN BONDS ---------- I would like to help some of you with a general explanation on how to calculate sensitivity and PLA in bonds. Many of you may know these issues, but I prefered to send a general message. Please disregard this CM if this is your case. The market factor (what generates the risk) in a bond, is the yield (the interest rate embedded in the investment). This means that the Position Sensitivity should relate to changes in yields. This sensitivities, then, multiplied by the volatility of the yields, would give us the PLA associated with the bond positions (expected portential loss if the yield moves agains us). To calculate the Position Sensitivity, first of all, you should know the "modified duration" of the bonds that you are holding. Duration is defined as the equivalent tenor in a bond, expressed in terms of a zero coupon bond (a bond that has only one payment at maturity and it is traded at discount). This means that for example, an investor should be completely indiferent to invest in a zero coupon bond of 2.25 years than in a 4 years bond (let's say with annual principal and interest payment) with also a 2.25 years duration. How t Continue...

01 How to calculate Position Sensitivity: PS Volume of position 0. 000 position), the unit shift considered is 1bp, the ON volatility of the yield is 60 bps and the defeasance period is 4 days PS 96. 3 (each time the yield changes 1bp, the position changes 19. 6 square root of 4 PLA 1930 1. 000 position), the unit shift considered is 1, the ON volatility of the yield is 60 bps (0. 72 ------- -------- ------- 96 100 2. 49 18 4 0. In the example above, the discount period is 1 year (it was done on an annual basis, so we should discount the annual yield.