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RISK MANAGEMENT FOR CHANGING INTEREST RATES - Coggle Diagram
RISK MANAGEMENT FOR CHANGING INTEREST RATES
Asset-Liability Management Strategies
Liability Management: control bank's liabilities → provide adequate liquidity and meet other goals
Funds Management
Asset Management: control bank's assets → provide adequate liquidity and earnings and meet other goals
Interest Rate Risk
The Measurement of Interest Rates
Bank Discount Rate: quoted on short term loans and money market securities
Dr =(100 - purchase price on loan on securities)/100 x360/ day to maturity
Yield to Maturty: the discount rate that equalizes the current market value
Price= [(Expected CF1)/(1+YTM)^1]+ [(Expected CF2)/(1+YTM)^2] +… +[(Expected CFn)/(1+YTM)^n]+ [(sale price of loan in n)/(1+YTM)^n]
The Maturity Gap and the Yield Curve
The Components of Interest Rates
Risk Premiums
Yield Curve
Yield cruves
'Upward ( rising yield curve ) long-term interest rate exceed short term interest rate
Downward ( falling yield curve )short-term interest rate higher than long term interest rate
Horizontal yield curve long-term interest rate and short-term are equal.
Interest-sensitive gap mgt as a risk-mgt tool
$ GAP = ISA - ISL >0
Ass-sensitive = ISA - ISL > 0 (positive ) gap
Lia-sensitive = ISA - ISL< 0 ( negative) gap
$ amount of repriceable = $ amount of repriceable ( interest - sensitive ass )( interest - sensitive Lia )
ISR = ISA / ISL
Duration
DGAP = DA - DL x L/A
Goal of hedging
Protect NIM → NIM = Net interest income / total earning assets