Transcription of USING DURATION AND CONVEXITY TO APPROXIMATE …
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USING DURATION AND CONVEXITY TO APPROXIMATE …
EDUCATION AND EXAMINATION COMMITTEE OF THE SOCIETY OF ACTUARIES FINANCIAL MATHEMATICS STUDY NOTE USING DURATION AND CONVEXITY TO APPROXIMATE CHANGE IN PRESENT VALUE by Robert Alps, ASA, MAAA Copyright 2017 by the Society of Actuaries The Education and Examination Committee provides study notes to persons preparing for the examinations of the Society of Actuaries. They are intended to acquaint candidates with some of the theoretical and practical considerations involved in the various subjects. While varying opinions are presented where appropriate, limits on the length of the material and other considerations sometimes prevent the inclusion of all possible opinions. These study notes do not, however, represent any official opinion, interpretations or endorsement of the Society of Actuaries or its Education and Examination Committee.
using the concepts of duration defined below, such approximations can be done quickly using nothing more than a handheld calculator. Even when full computing power is available, approximations like the ones in this note are essential. For example, when doing multi-year projections using Monte Carlo techniques for
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