Risk management with duration: Potential and limitations

This paper demonstrates the applicability of duration as a risk management tool for government organizations. Drawing on a real case, we present metho dologies for quantifying (a) the durations of real assets on a government's balance sheet, and (b) the durations of the financial assets represented b y shares in state-owned enterprises (SOEs). In the area of real physical as sets on the balance sheet we focus on the highway system and on real estate owned by the government. The methodology for measuring durations of SOEs f ocuses primarily on an electrical utility. Our main conclusion is that it i s feasible to derive excellent practical measures of the real durations of physical assets on a government's balance sheet. Far from being academic cu riosities-such durations can be estimated with a fair degree of accuracy in practice. The paper also indicates some of the potential limitations of du ration analysis as a risk management tool for such organizations.