1. Cash Flow Engine Reference Guide
  2. Monte Carlo Analytics
  3. Defining a Rate Index Formula
  4. Computation of Effective Duration and Effective Convexity

13.17.3 Computation of Effective Duration and Effective Convexity

Oracle ALM does not directly output effective duration and effective convexity. However, a simple manual procedure computes delta and therefore effective duration and convexity. We describe this procedure hereafter.

  1. Create a Forecast Rates Assumption Rule with 3 scenarios:

    Scenario 1: Flat Rates

    Scenario 2: Shock Up 100 bps

    Scenario 3: Shock Down 100 bps

  2. Run an Oracle ALM Deterministic Process to compute the market value for all 3 scenarios. Scenario 1: MV0 Scenario 2: MV+ Scenario 3: MV-
  3. Effective Duration can be easily computed manually (for example, in ALMBI):

    Figure 13-21 Formula to calculate the Effective Duration


    This image displays the Formula to calculate the Effective Duration.

    Description of formula to calculate the Effective Duration follows:

  4. Effective Convexity can also be easily computed manually: