Duration Risk

Duration risk is the sensitivity of an asset price to changes in interest rates, typically measured by the duration of a bond or a portfolio of derivatives. It quantifies how much the value of an asset will change for a one-percentage-point shift in interest rates.

Assets with higher duration are more sensitive to rate changes, making them riskier in environments where rates are volatile or trending. This risk is a primary concern for fixed-income investors and those holding interest rate-sensitive derivatives.

In the context of cryptocurrency, while direct interest rate sensitivity is less common, decentralized finance protocols that use lending rates or yield-bearing tokens face similar duration risks. Managing this risk involves hedging with interest rate swaps, futures, or adjusting the maturity profile of the portfolio.

It is the first-order approximation of the price-yield relationship. While duration provides a good estimate for small rate changes, it fails to capture the full picture for large shifts due to the lack of curvature consideration.

Thus, it is often paired with convexity for a complete risk assessment.