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Measuring Interest Rate Risk in the Very Long Term
Report

Measuring Interest Rate Risk in the Very Long Term

FRBSF, 2017

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Editorial Rating

8

Qualities

  • Analytical
  • Innovative
  • For Experts

Recommendation

Judging interest rates and pricing financial instruments can challenge even the savviest professional, but determining how to adequately price risk that extends 50 years and beyond is a real conundrum. In some cases, the benchmark 30-year US Treasury bond may be insufficient. Economists Jens H.E. Christensen, Jose A. Lopez and Paul L. Mussche contend that insurers, traders and bankers can gauge interest rate risk beyond 30-year timelines through “extrapolation.” getAbstract suggests this complex yet illuminating report to insurance professionals and financial experts interested in the pricing dynamics of interest rates.

Take-Aways

  • Financial professionals need to incorporate long-term views when setting interest rates on a range of financial transactions.
  • US Treasury securities – considered “relatively risk-free” – provide a normally reliable basis from which to assess, gauge and price risk. 
  • However, for transactions such as insurance contracts, which extend for an individual’s lifetime, the 30-year Treasury may not adequately reflect that extremely long-term risk.

About the Authors

Jens H. E. Christensen, Jose A. Lopez and Paul L. Mussche are researchers at the Federal Reserve of San Francisco.