PPT Slide
The concave shape is the offsetting influence of the diffusion effect and
Diffusion effect - the variability phenomenon that the underlying
variable diffuses away from the initial value.
Amortization effect - reduction in the number of years of cash flows
that needed to be replaced.
The maximum exposure will depend on the confidence level chosen.
If two standard deviations on a one-tail test are used to calculate the
maximum exposure, then there is statistically only a 2.5% chance the
actual exposure is greater than the calculated maximum exposure.