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Curve-Risk Hedge Map: Key Rate Duration, Immunization, and Butterfly Trades

AcadiFi Editorial·2026-05-20·16 min read

Why curve-risk questions keep trapping candidates

Candidates usually learn duration in a clean sequence: higher coupon lowers duration, longer maturity raises duration, and price falls when yields rise. That is all true. The problem is that exam questions often stop being about one bond and one parallel shift.

Once the vignette starts talking about a hedge, a liability, a callable bond, or a twist in the curve, the real task changes. You are no longer asking, "What is the bond's duration?" You are asking, "What kind of rate risk is actually on the table?"

That is the point of a curve-risk hedge map.

flowchart TD A["Start with the risk question"] --> B{"Are cash flows fixed if rates move?"} B -->|No| C["Use effective duration intuition"] B -->|Yes| D{"Is the yield shift parallel?"} D -->|Yes| E{"Is there a liability target?"} E -->|No| F["Aggregate duration may be enough"] E -->|Yes| G["Immunization: match PV and duration, then rebalance"] D -->|No| H["Use key rate duration to locate curve exposure"] H --> I["Curve view or hedge can become a butterfly / barbell / bullet trade"]

Aggregate duration is a starting point, not the whole answer

Aggregate duration is useful because it compresses interest-rate sensitivity into one number. If a portfolio has duration of 5.8, you immediately know the approximate effect of a small parallel rate move.

That shortcut becomes dangerous when the curve does not move in parallel. A portfolio can look neutral on aggregate duration and still carry a large exposure at one maturity bucket.

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