Week 7 - Interest Rate Risk PDF

21/04/2015
Week 7 Interest Rate Risk

Chapter 14
Mark W. Werman
125.220
Learning objectives
To consider the economys and business cycles impacts on
interest rates
To analyse the business cycle and its impacts
To learn how to monitor and to use basic business indicators as a
guide to financial decision making
To be familiar with some common methods of forecasting interest
rates
To learn the major financial risks faced by financial institutions and
the management techniques used to deal with these risks, in
particular interest rate risk and duration
MWW - 125.220 - Semester 1

2015
Introduction
Interest rates change:
Central banks control inflation using open market operations to
control inflation
Increase cash rate to slow economy down
Lower cash rate to stimulate the economy
Change in interest rate creates uncertainty
Why will it increase

When will it increase - unknown (uncertainty)
How does it affect us?
How much will interest rates change?
Eco. Indicators makes forecasting hard i.e. housing

market strong and rural sector weak
2015
21/04/2015
Introduction
Why must interest rate risk be managed?
Interest rate changes represent:
Change in the cost of borrowing
Return on investment
Affect the value of financial assets and liabilities
Risk relates to uncertainty the probability that an

outcome will be different from that which has been
forecast
Something will occur that has not been taken into
account
2015
Origins of modern risk management

After the events of the1930s, laws were passed to limit
activities of FIs so that regulators set prices & costs
FIs usually profitable & few failed.
With interest rate rises in 70s, depositors withdrew funds
from FIs in order to find higher returns.
Because of regulations, FIs unable to respond changes
in the economy
1980s government many of the restrictions on FIs
loosened or removed (Regan, Thatcher, etc
called deregulation...
e.g. interest rate controls in July 1984
2015
Origins
1980s saw volatility of such financial variables as interest rates

& exchange rates .
Volatility refers to average change in price (e.g. exchange rates
or interest rates) which occur over a specific time interval
e.g. NZ$1= 0.87 US & $1=0.82 US over a week.
With the abandonment of fixed exchange rate regime in the 70s,the

floating exchange rates regime has been accompanied by increased
volatility due to a number of influences
fluctuation in commodity prices
stresses in global financial system
large current account deficits run by some countries

2015
21/04/2015
Origins
1980s Savings and Loan Crisis in the US

2015
Origins
L/T volatility of cash S/T interest rates since their use as
sole instrument of monetary policy in many countries.
As well, longer-term interest rates have become more
volatile over S/T horizons due to impact of deregulation.
removals of ceilings on interest rates more sensitive
to changes
marketing of govt. securities by tender increased
sensitivity to change
L/T interest rates are related to S/T rates & reliance of
monetary policy on S/T rates has added to long-run
volatility
2015
Origins
Period of deregulation coincided with & was encouraged
by rapid developments in technology & innovation in
products that FIs offer.
All these changes exposed FIs to risks that need
managing.
FI managers must devote considerable time & resources
to managing the various risks
E.g. A bank has a asset and liability management
committee (ALCO) i.e. risk management committee for this
purpose

2015
21/04/2015
Consequence
Majority of business are exposed to interest rate
risks therefore it must be managed
Try to forecast future interest rate changes but
there is still uncertainty

2015
10
Performance and risk in Financial

Institutions
All types of FIs must actively manage their organisations to obtain
an adequate return on equity capital.
For a bank, return is managed by prudent setting of prices on loans
& deposits and control of operating expenses.
Two measures often used to report firms performance
1. return on assets (ROA= profit/dollar of total assets
2. return on equity (ROE)= profit/dollar of equity capital
Norm for banks ROA - less than 1% on assets.

ROE for banks - much higher
Second aspect - control of risk
2015
11
Risk
Risk is defined as the chance that actual outcome will
differ from expected outcome.
It equals uncertainty (usually of a loss).
Risk is assumed to arise out of variability
Example:
if an assets return has no variability, it has no risk.
So the security T bill is considered to have no risk
So used as a proxy for a risk-free asset
The risk of a distribution can be assessed.

Commonly used measure is standard deviation
2015
12
21/04/2015
The modern FI faces several risks to

consider, measure & control
Interest rate risk

Credit (default) risk
Off-balance sheet risks
Operational/technology risk
Liquidity risk
Foreign exchange risk
Country/sovereign risk
For a bank, the first two are major risk
2015
13
14.1 Interest rate risk

Chapter 13 considered the:
macro-economic context of interest rates
loanable funds approach to interest rate
determination
theories that explain the shape of the yield curve
The timing and extent of interest rate changes is
unknown
Interest rate risk needs to be managed
2015
14

During and after the GFC, interest rate risk were an
important topic
As credit risks emerged during 2007 and 2008, interest
rates rose sharply
Sharp and sudden rises in interest rates exposed many
individuals and firms to higher borrowing costs
The identification and management of interest rate risk is
important for firms and financial institutions
2015
15
21/04/2015
Interest Rate Risk For FIs

Sensitivity of future cash flows & value of assets or liabilities-(for
borrower their liabilities or lender their investments) to uncertain
changes in interest rates
For FIs the deposits of FIs often have different maturity & liquidity
characteristics than the securities (loans in the case of a bank) they
sell.
The mismatching of maturities of assets & liabilities FIs exposed to
risk of lower than expected net interest income.
Two important aspects of interest rate risk:
1. refinancing risk
2. reinvestment risk

2015
16

Interest rate risk takes two forms
1. Reinvestment risk
Impact of a change in interest rates on a firms future
cash flows
2. Price risk
Impact of a change in interest rates on the value of a
firms assets and liabilities
An inverse relationship exists between interest rates
and security prices; i.e. a rise in interest rates results
in a fall in the value of an asset or liability, or vice
versa
2015
17
Example
Example
: Consider an FI that issues 1-yr maturity liabilities (deposits) to
provide funds for their assets (term loans) with 2-yr maturity (i.e.
maturity of assets longer than maturity of liabilities
Liabilities
Assets

2015
18
21/04/2015
Example
Cost of funds (liabilities) is 9% pa & return on assets is 10% over 1
year FI can lock in profit spread of 1% by borrowing S/T(1 yr.) &
lending long-term (2 yr).
Uncertainty for year 2 if interest rates stay the same, FI can
refinance its liabilities at 9% & lock in profit of 1%.
If interest rates & FI can only borrow new 1 yr liabilities at 11%,
then spread is negative (-1%).
Whenever FI holds longer term assets relative to liabilities, it
potentially exposes itself to refinancing risk
- risk that cost of re-borrowing funds is more than returns earned on
asset investment.
Classic example: US Savings & Loans banks in 1980s loaned
money at 8.5% and borrowing costs over 15%
2015
19
Example
Example:
Or, suppose FI issues securities (borrows funds) at 9% pa for 2 yrs
& invested the funds in assets that yield 10% for 1 yr. (has 1-yr
loans) i.e. maturity of assets smaller than maturity of liabilities.
Assets
Liabilities

2015
20
Example
FI still locks in one-year profit of 1%. At the end of first
year, asset matures & funds have to be reinvested. If
interest rates so that return on assets is 8%, then FI
faces a loss in second year of 1%.
FI is exposed to reinvestment risk - the risk that the
returns on the funds to be reinvested will fall below the
cost of the funds.
Recent example
: banks operating in Euromarkets (overseas
markets) that borrowed fixed-rate while investing in
floating-rate loans
2015
21
21/04/2015
Market Value risk

In addition to potential refinancing or reinvestment risk affecting its
net interest income, an FI faces market value risk (price risk) on
assets or liabilities.
Rising interest rates increase discount rates on future cash flows &
the market value (price) of that asset or liability . FIs also face
price or market risk on its assets and any securities it holds
Price risk is:
Price or market risk arises from the important relationship between
interest rates & prices of financial assets

2015
22
Example
Market risk Example of debt security: Pricing of fixedinterest security e.g. 2 yr bond coupon 8.0% p.a.,par
value $1,000 with semi-annual interest payments,
current market rates 8%
T
price
t 1
price
Ct
1 r
40
1.04
Fv
1 r
40
1.04
40
1.04
40 1, 000
1.04
1, 000
Bond sells at par because the YTM = coupon rate

2015
23
Change in YTM
If the firm is seen as more risky i.e. if market expects
10% or comparable current market instruments are no
offering 10%...
40
40
40
1, 040
Then
price
1.05 1.052 1.053 1.054

= $964.54 at discount
Price of bond moves to a discount so bond buyers can
earn comparable yields to other market instruments.
S/T & L/T debt securities such as bonds show different
sensitivity to interest rates.
2015
24
21/04/2015
For the same coupon

Example:
(i) For 2-year bond, 8% pa semi-annual coupon, face value $1,000 &
market interest rates are 8%
Price is ______.
(ii) For 10-year bond, 8% pa semi-annual coupon, face value $1,000
and market interest rates are 8%
Price is ______.
Now interest rates change to 10%,
2-year bond price is now $964.54
10-year bond is now $875.38
So for bonds with the same coupon interest rate, ____ bonds
change proportionately more in price than ____ bonds for a given
interest rate change. But at maturity what happens?
2015
25
For the same maturity: Example

(i) for 10-year bond, 8% pa semi-annual coupon,
face value $1,000 & market rates 8% pa, price is $1,000
(ii) for 10-year bond, 4% pa semi-annual coupon, face
value $1,000 & market rates 8%, price is $728.19
Now interest rates change to 10% pa
For (i) price is now $875.38 = 12.5% change
For (ii) price is now $626.13 = 13% change
So for bonds with the same time to maturity, price
volatility of a ______coupon bond is ________ than that
of a ______ coupon bond.
2015
26

Interest rate risk exposures may also be described as:
Direct
Reinvestment and price risk
Indirect
Relating to the future actions of market participants,
e.g. a rise in interest rates causes borrowers to seek
new loans elsewhere and/or repay existing loans
Basic
Occurs when pricing differentials exist between
markets, e.g. futures market and the underlying
physical market
2015
27
21/04/2015
14.2 Exposure management systems

An exposure management system involves structured
procedures that enable a firm to effectively measure and
manage risk, including:
Forecasting
Strategies and techniques
Management reporting systems

2015
28

Forecasting Need to know and understand the market
A firm needs to understand factors that will impact
upon risk exposures and its environment
A firm must know the current structure of its
balance sheet and
forecast future changes in its assets, liabilities and
equities with regard to:
future business activity growth
future interest rates
future financing needs and use of debt financing (future
cost of capital)
2015
29

The strategies and techniques used relate to the types of
interest cash flows associated with a firms assets and
liabilities, and include:
Specified proportions of fixed-interest versus floatinginterest debt, with remaining portion available to take
advantage of forecast changes

2015
30
10
21/04/2015

Monitoring and adjusting the maturity structure
of assets and liabilities, taking into account the
term structure of interest rates
Maturity structure is the relative proportion of
assets and liabilities maturing at different time
intervals
Liability diversificationwhere a firm raises
funds from a range of different sources, thereby
reducing its exposure to potential interest changes
in a particular market
2015
31
14.2 Exposure management systems (cont.)

Two broad interest rate risk management
techniques are discussed later
1.
Internal methods
2.
External methods

2015
32

Management reporting
Policies and procedures need to provide clear
instructions on:
the type of information to be reported

frequency of reports
report hierarchy
delegation and staff responsible to act on the
reports
the need for audit and review of policies and
procedures
2015
33
11
21/04/2015
14.3 Assets repriced before liabilities

principle
Interest rate risk is the sensitivity of assets, liabilities and
cash flows to changes in interest rates
Assets repriced before liabilities (ARBL) is a risk
management technique that ensures net margins and
profitability are protected
A firm should measure the ARBL interest rate sensitivity
of its balance sheet assets and liabilities over a range of
planning periods
2015
34
14.3 Assets repriced before liabilities principle

Positive ARBL gap exists when assets are repriced
before liabilities and an organisation is able to benefit;
e.g.:
Interest rates are forecast to rise
A bank increases the interest rate received on
loans (assets) before increasing the rate paid on
deposits (liabilities)
A company increases the price of its goods
(assets) before or at the same time as interest
rates rise on its floating-rate loan (liability)

2015
35
14.3 Assets repriced before liabilities principle

Negative ARBL gap exists when liabilities are repriced
before assets; e.g.:
Interest rates are forecast to fall
A bank lowers the interest rate paid on deposits
(liabilities) before lowering the rate received on
loans (assets)
Interest rates are forecast to rise
A bank may implement strategies to narrow the
negative ARBL gap

2015
36
12
21/04/2015
14.4 Pricing financial securities

The effect of interest rate risk on the price of discount
securities and fixed-interest corporate/government bonds
can be demonstrated using calculations discussed in
Chapters 9, 10 and 12
Price
face value 365
365 yield days to maturity

100
price
Fv
1 rt
2015
37

Example 1: A company is to issue a 90-day bank bill
with a face value of $500 000, yielding 9.5% per
annum.
What amount will the company raise on the issue?
$500 000 365

365 (0.0950 90)
182 500 000
373.55
$488 555.75
Price

2015
38

Example 1: If the company has a rollover facility in
place for this bill, it is exposed to interest rate risk at
the next repricing date, i.e. the rollover date in 90
days time. If the yield at the next rollover date is
9.75% per annum the company will raise :
$500 000 365
Price
365 (0.0975 90)
182 500 000
373.775
$488 261.66
Note: cost of borrowing increased by $294.09
2015
39
13
21/04/2015
Pricing fixed interest security
1 1 i n
n
k
price pmt
Fv 1 i 1 i
i
Where:
I = current yield
n= number of period that cash flows occur
Pmt periodic fixed coupon payment
Fv face value
k= fraction of the elapsed interest period
2015
40
Example
A funds manager is holding a corporate bond in an investment
portfolio, The bond has a face value of $1,000,000 and pays 10%
per annum half-yearly coupon and matures on December 31, 2018.
Assume today is 20 May 2013 and the current yield on similar
investments is 12% per annum. What is the value of the bond?
Semi-annual coupon payment = $50,000

FV = $1,000,000
I = 0.06 (12%/2)
n= 12 (6*2)
k= 140/181 (Jan 31, Feb 28, Mar 31, April 30 And May 20 = 140
days
$958,397.46
2015
41
14.5 Repricing gap analysis

This is the monitoring of the interest rate sensitivities of assets and
liabilities over specified planning periods
Interest rate sensitivity (or repricing gap) relates to the repricing
of an asset or liability during a planning period
Defined as rate-sensitive assets minus rate-sensitive
liabilities
The longer the planning period, the more likely a security is to be
rate sensitive
E.g. a 90-day discount security is not interest rate
sensitive over a one-month planning period, but it would
be over a six-month planning period

2015
42
14
21/04/2015

Three groupings of assets and liabilities assist in determining the
repricing gap (matching principle)
1. Interest-sensitive assets financed by interest-sensitive
liabilities
Are both sides of the balance sheet affected at the same time
and to the same extent?
2. Fixed-rate assets financed by fixed-rate liabilities and equity
Are not exposed to interest rate risk during a planning period
as the cost of funds and return on funds is fixed
3. Rate-sensitive assets financed by fixed-rate liabilities or vice
versa
One side of the balance sheet is exposed to interest rate risk
while the other is not
2015
43

2015
44

2015
45
15
21/04/2015
Change in profitability = Gap x change in rates x

period
= $15 billion x 0.005 x 1
= $75 million
Re-pricing gap analysis

Monitors the sensitivity of a balance sheet (assets and
liabilities) to interest rate changes over specific planning
periods. Example 1 month and 6 month periods
Example a 3 month term deposit is not rate sensitive in a
one-month planning period
Re-pricing gap is the interest rate risk and is measured
as rate-sensitive assets minus rate-sensitive liabilities

2015
47
14.6 Duration
Duration is another tool for the measurement and
management of interest rate risk exposures
It is a measure in years and considers the timing and
present values of cash flows associated with a
financial asset or liability
Duration is calculated as the weighted average time
over which cash flows occur, where weights are the
relative present values of the cash flows

2015
48
16
21/04/2015
Duration
It is a measurement of how long, in years, it
takes for the price of a bond to be repaid by its
internal cash flows.
Important measure for investors;
Bonds with higher durations carry more risk and have
high volatility than bonds with lower risk
Remember price relationship to yield

Yield
Price
2015
49
14.6 Duration
The duration calculations in Table 14.4 can also be
achieved using Equation 14.5
N Ct (t )
t 1(1 i )t
C
N
t
t 1(1 i )t
where
C dollar value of cash flows at time t
t
t the number of periods until the cash flow is due
i current market yield expressedas a decimal
N number of cash flows
2015
50
14.6 Duration
Duration: $1,000 bond, 9.00%pa, fixed annual coupon, 3 yrs
to maturity current yield 10%

2015
51
17
21/04/2015
14.6 Duration (cont.)

Example: Assume the funds manager has forecast
that interest rates will continue to rise by another
50 basis points. The approximate change in the
value of the corporate bond in Table 14.4 is:
0.0050
% price [2.7559]
(1 0.10)
0.012527
1.252 7%
therefore
price $975.12 x 0.012527
$12.22
i.e. the bond w ill fall by $12.22 from $975.12 to $962.90
14.6 Duration
Duration: $1,000 Bond, 11.00%pa fixed annual coupon, 4 yrs to maturity,
current yield 12% pa
Year (t)
Cash flows $
PVIF @ 12%
Present
value PVCF
$110.00
0.8929
98.22
98.22
Weighted cf
T*PVCF
$110.00
0.7972
87.69
175.38
$110.00
0.7118
78.30
234.90
$1,110.00
0.6355
705.41
2,821.64
969.62
3,330.14
Duration = weighted cash flows/present value (price) = 3,330.14/969.62 =

3.4345 years

2015
53
Duration
The approximate change in the four year bond is: four
year bond:
% price
0.0050
[3.4345]
(1 0.10)
0.015333
1.5333%
therefore
price $969.62 x 0.015333
$14.87
i.e. the bond will fall by $14.87 from $969.62 to $954.75

2015
54
18
21/04/2015
14.6 Duration
Duration can also be used to ascertain the dollar impact
of a change in interest rates on the value of a financial
asset or security
The change in value will be proportional to the
duration, but in the opposite direction
r
(1 r )
% price duration
where
r is the current yield, expressed as a decimal,
before the interest rate changes,or is forecast to change
2015
55
14.6 Duration
Duration can also be applied to a portfolio of assets and
a portfolio of liabilities
Duration of a portfolio is the weighted duration of
each asset and liability in a portfolio
r
(1 r )
% in equity [DA DLk ]A
where
DA duration of assetportfolio
DL duration of liability portfolio
k leverage, being % of assets funded by liabilities
r current yield, expressedas a decimal,before an interest rate change
A dollar value of assetportfolio
2015
56

2015
57
14.6 Duration
19
21/04/2015
Duration zero coupon bond

2015
58
Duration vanilla bond
Duration will always be less than its time to maturity

2015
59
Duration of an asset and liability portfolio
r
%
inequity

DA DL k A
1 r

2015
60
20
21/04/2015
Duration
r
%
inequity

DA DL k A
1 r
Where:
DA = duration of asset portfolio
DL = duration of liability portfolio
k = leverage being the proportion of assets funded by liabilities
r = current yield
A dollar value of the portfolio
2015
61
Example: Basic facts
DA 4.690years
DL 2.520 years
k $35mil / $50mil 0.70
r 0.08
changein

r 0.01
A $50
mil
L $35
mil
2015
62
Change in value of asset portfolio
0.01
%
in
asset portfolio 4.6900
0.043426 4.3426%
1 0.08
Therefore :

in
asset portfolio $50, 000, 000* 0.043426
$2,171, 296.30
value
of
assets $47,828, 703.70

2015
63
21
21/04/2015
Change in value of liability portfolio
0.01
%
inliability

portfolio 2.5200
0.023333 2.3333%
1 0.08
Therefore :

in
asset portfolio $35, 000, 000* 0.023333
$816, 666.67
value
of
assets $34,183,333.33

2015
64
Change in value of equity

0.01
%
in
equity 4.6900 2.5200*0.70 *$50, 000, 000
1 0.08
0.01
2.9260*$50, 000, 000
$1,354, 629.63
(1 0.08)
Therefore :
value
of
equity $13, 645,370.37 from
$15, 000, 000
Or Value of assets $47,828,703.70 the value of

liabilities $34,183,333.33 = value of equity
$13,645,370.37
2015
65
New balance sheet
Assets $47,828,703.70 Liabilities $34,183,333.33

Equity
$13,645,370.37
Liabilities are now 71.47 per cent of the firms capital

structure

2015
66
22
21/04/2015
14.6 Duration
Change in the value of equity = change in the value of asset
portfolio - change in the value of the liability portfolio
Limitations of duration as a measure of interest rate risk
Unrealistically assumes changes in interest rates occur along the
entire maturity spectrum; i.e. parallel shift in yield curve
Assumes yield curve is flat; i.e. yields do not vary over time
Duration is a static measure at a point in time, requiring regular
recalculation to incorporate changes in cash flow, yield and
maturity characteristics of assets and liabilities
Assumes linear relationship between interest rate changes and
price, whereas pricing of fixed-interest securities exhibits
convexity

2015
67
Duration
Measure of interest rate risk
Comparative measure of risk securities that have
different yields, cash-flow structures and terms of
maturity
It is the weighted average over time over which cash
flows occur, where the weights are relative present value
of cash flows

2015
68
Duration
Duration calculation:
Identify periodic cash flows
Calculate the present value of those cash flows based
upon current market yields
Multiple by the relevant time period (t) to obtain the
weighted cash flows
Divide the total of the weighted cash flows by the
present value of the security
= duration

2015
69
23
21/04/2015
Duration
Comparing:
Asset with the lowest duration has the lowest level of interest
rate risk
Used to calculate change in value:
r
% price duration
1 r
Used to calculate change in equity of a portfolio:

r
inequity DA Dl k A
1 r
DA duration of assets, Dl - duration of liabilities, A is

assets and k leverage % of assets funded by liabilities
2015
70
14.8 Interest rate risk management techniques

Include internal and external methods
Internal methods involve the restructuring of a firms balance
sheet and associated cash flows
Asset and liability portfolio restructuring
E.g. a funds manager sells part of its bond portfolio and
invests the funds in shares or property
Asset and liability repricing
E.g. seeking fixed-rate funds in periods when interest
rates are rising

2015
71

Internal methods (cont.)
Cash flow timing
Change the timing of cash flows to minimise the effect of
interest rate changes or to take advantage of forecast
rate movements
E.g. switching from one security to another with
different frequency of interest payments
Reduced reliance on interest rates
E.g. the introduction of other fees on loans by a bank
Prepayment and pre-redemption conditions
E.g. early payment penalties to discourage borrowers
from repaying floating-rate loans early in periods of rising
interest rates
2015
72
24
21/04/2015

External methods
External methods involve using off-balance-sheet
strategies
These involve primarily the use of derivative products
allowing a party to lock in a price today that will apply at
a specified future date; i.e. futures contracts, forward rate
agreements, options and swaps (discussed in Part 6)

2015
73
14.9 Summary
Interest rate risk is the sensitivity of the value of balancesheet assets and liabilities and cash flow to movements
in interest rates
Interest rate risk exists in the form of reinvestment risk
and price risk
A firm must establish an effective interest rate exposure
management system, including forecasting the future
balance-sheet structure and the related interest rate
environment
2015
74
14.9 Summary
ARBL is a basic principle of interest rate risk
management
A range of internal and external interest rate risk
management techniques exist

2015
75
25

Week 7 - Interest Rate Risk PDF

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Week 7 - Interest Rate Risk PDF

Uploaded by

Copyright:

Available Formats

21/04/2015

Week 7 Interest Rate Risk

MWW - 125.220 - Semester 1

Change in interest rate creates uncertainty

Why will it increase

Eco. Indicators makes forecasting hard i.e. housing

Risk relates to uncertainty the probability that an

Origins of modern risk management

1980s saw volatility of such financial variables as interest rates

With the abandonment of fixed exchange rate regime in the 70s,the

MWW - 125.220 - Semester 1

MWW - 125.220 - Semester 1

MWW - 125.220 - Semester 1

MWW - 125.220 - Semester 1

Performance and risk in Financial

Norm for banks ROA - less than 1% on assets.

The risk of a distribution can be assessed.

The modern FI faces several risks to

Interest rate risk

14.1 Interest rate risk

14.1 Interest rate risk

Interest Rate Risk For FIs

MWW - 125.220 - Semester 1

14.1 Interest rate risk

MWW - 125.220 - Semester 1

MWW - 125.220 - Semester 1

Market Value risk

MWW - 125.220 - Semester 1

Bond sells at par because the YTM = coupon rate

1.05 1.052 1.053 1.054

For the same coupon

For the same maturity: Example

14.1 Interest rate risk

14.2 Exposure management systems

MWW - 125.220 - Semester 1

14.2 Exposure management systems

14.2 Exposure management systems

Strategies and techniques

MWW - 125.220 - Semester 1

14.2 Exposure management systems

14.2 Exposure management systems (cont.)

Strategies and techniques

MWW - 125.220 - Semester 1

14.2 Exposure management systems

the type of information to be reported

14.3 Assets repriced before liabilities

14.3 Assets repriced before liabilities principle

MWW - 125.220 - Semester 1

14.3 Assets repriced before liabilities principle

MWW - 125.220 - Semester 1

14.4 Pricing financial securities

face value 365

365 yield days to maturity

14.4 Pricing financial securities

$500 000 365

MWW - 125.220 - Semester 1

14.4 Pricing financial securities

Pricing fixed interest security

Semi-annual coupon payment = $50,000

14.5 Repricing gap analysis

MWW - 125.220 - Semester 1

14.5 Repricing gap analysis