Ratio

Understanding “Calculations of Effective Duration” in Forex Trading

5 min read

Effective duration provides the approximate change in a bond’s price that would result from a 1% change in interest rates. It is an important concept for managing bond exposure in a portfolio since it represents the sensitivity of bond prices to interest rates. By calculating the effective duration of each bond in a portfolio, investors can calculate the expected change in portfolio’s value due to changes in interest rates. To calculate the effective duration of a bond, investors must first understand the bond’s payment structure, as well as the price of the bond and the yield to maturity.