Fisher-Weil duration and Forward forward contract: Difference between pages

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''Risk management''.  
A forward forward borrowing or deposit is a binding contract struck today, for the physical borrowing or lending of funds at a fixed future date. (At an agreed rate, for a predetermined fixed period.)
   
   
The Principal amount borrowed or lent is physically transferred between the parties, and repaid - plus the contracted amount of fixed interest - at maturity.


Duration calculates the weighted average timing of the cashflows of an instrument, weighted by the present values of the cashflows.
Not to be confused with a Forward Rate Agreement, which is a derivative contract for differences.
 
 
Two forms of the duration measure are Macaulay's duration (which is simpler) and Fisher-Weil duration (which is more refined).
 
Macaulay’s duration assumes a flat yield curve - in other words the same yield (to maturity) for all maturities of cashflow.
 
Fisher-Weil duration is a refinement of Macaulay’s duration which takes into account the term structure of interest rates.
 
 
Fisher-Weil duration calculates accordingly the present values of the relevant cashflows (more strictly) by using the zero coupon yield for each respective maturity.
 
This refinement is particularly important when the cash flows are longer term and when yields vary significantly for different maturities.
 


== See also ==
== See also ==
* [[CertFMM]]
* [[Forward forward borrowing]]
* [[Duration]]
* [[Forward forward deposit]]
* [[Macaulay duration]]
* [[Forward forward rate]]
* [[Yield curve]]
* [[Forward rate agreement]]
* [[Forward yield]]
* [[Principal]]

Revision as of 11:49, 11 November 2015

A forward forward borrowing or deposit is a binding contract struck today, for the physical borrowing or lending of funds at a fixed future date. (At an agreed rate, for a predetermined fixed period.)

The Principal amount borrowed or lent is physically transferred between the parties, and repaid - plus the contracted amount of fixed interest - at maturity.

Not to be confused with a Forward Rate Agreement, which is a derivative contract for differences.

See also

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