Curve risk
Definition · Level 8 · Rates, FX & macro
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The risk left in a hedge whose dollar-per-basis-point risks cancel but whose two sides have different maturities: short and long yields can move by different numbers of basis points.
Example
Long 10-year, short 2-year with equal risk per bp: 10-year −20 bp, 2-year −5 bp → the book gains.
Where Tradecraft teaches it
Level 8 · Rates, FX & macro, in the lesson “Hedging a DV01, and convexity”: Count the contracts that flatten a DV01, then see what duration misses on big moves.
Related terms
- Bond convexityCurvature of the price–yield relationship.
- DV01 hedge (hedge count)Offset a position’s DV01 with the opposite position in a hedging instrument: count = position DV01 ÷ DV01 of one contract (or one million of face).
- Negative convexityConvexity below zero: the price rises less for a fall in yields than it drops for a rise.
- 2s10sThe 10-year Treasury yield minus the 2-year yield, in bp: the headline gauge of curve slope.
- Annualized rateA short-period rate compounded to a year: (1 + monthly rate)^12 − 1, or (1 + quarterly rate)^4 − 1.
- Bank RateThe Bank of England’s policy rate, set by the Monetary Policy Committee at eight meetings a year, aiming at 2% inflation.