i/r deriv trading risk

Hi i was reading about interest rate risk and was looking to get a discussion going. I have been reading abot deriving risk from a yield curve where the yield curve and discount factors are derived by cash, futures and swaps securities.

Trying to find the delta risk of a book of i/r deriv trade to a 1 basis point shift in interest rates and see how much pv of a book moves. i.e if i was in a trading enviroment in middle office, i would be giving the trader these details so he could hedge his risk etc.

No im a tad confused with bucketed risk.i.e when trying to find out risk on a book at different time frames, i.e 1 day 3month 6 month 1 year 2 year 5 year. Each of these buckets may contain risk,now what i dont get is, is this risk just at a particular point in time or does it cover the period ie h period of 3 months or the period of 1 year.

now this might make no sense to anyone but ive been going nuts cuz the books i read don't explain it and apart from getting an A at gsce maths i havnt studied it at a higher level so all these interpolation eaqution dont really make much sense etc. if you can help that would be gr8!

The buckets don't represent risk at a particular point in time. They represent risk to a 1bp shift in a particular fwd rate. The exact notation that allows you to determine the exact forward in question may differ. I can help you further if you have more specific questions.

thanks for the reply martinghoul. I do this on a system in my dayjob and we bump one rate or bucket on the curve to derive what will happen to the risk on a particular book. However if i say shifted the 3 month rate by 1 basis point it will not only give me the delta risk in pv for that point but it will effect other rates aswell say the 2 month and the 6 month, is that possible or is it just error in the computer model.

We have a system at work where curves are uploaded to generate discount factors, we specify the book and what we want to know i.e the pv of the book or the risk. So its all done for me but i would like to know more about what i am doing at work rather then just pushing buttons lol.

It may be an error or it may be by design... Different yield curve models and different interpolation methodologies may cause the "spillover" effects that you're observing. A trader should generally be aware of these effects and correct for them, if necessary. Furthermore, traders also can make a conscious decision about whether they want to look at what's referred to as "fwd-fwd" bucketed risk or "par" bucketed risk (but I assume you know which one of the two you're using). The latter is actually very different, because it doesn't involve shifting fwds. Generally, have you read the usual rates books? Specifically, I'd recommend Tuckman's "Fixed Income Securities", as well as the "Understanding the Yield Curve" series of papers by Antti Ilmanen. If you need more help, send me a PM or feel free to ask more questions.