Q.704 Anil Kumar has recently joined Axe Investment Bank as a junior analyst through a global analyst recruitment program. In order to impress the management of the asset management unit of the bank, he decided to create a combined position in interest rate futures contracts that does not change in value with small changes in yield. With the help of a duration-based hedging strategy, he created a combined position of a portfolio and interest rate futures contracts that has zero duration, which means the value of the position will not change with the small changes in yield. However, his manager did not like the idea of using duration-based hedging or duration as a single risk measurement tool because of its limitation. His manager mentioned the following limitations of duration:

I. Since duration only measures the linear approximation of the relationship between two variables, it is inappropriate to use duration since the price/yield relationship of a bond is convex.

II. Duration implies that the yields are non-correlated. However, in the long run, when the changes in interest rates are non-parallel or non-correlated, the use of duration is limited.

Which of these limitations is/are accurate?