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Interest Rate Risk - Identification & Measurement

Historically banking was seen as a simple business, but things have changed in recent times. As new products and services appear in the industry, they are affected by interest rates in different ways. For much of the 20th century, interest rates in major economies were docile creatures. There was little variation in absolute rates, and the term structures (yield curves) were mildly positive. More recent decades saw a dramatic change. Rates and curves became much more volatile, and yield curves would move from positive to negative (or vice versa) in short periods of time.

 

This course – the first of two on managing interest rate risk – looks at the issues surrounding the identification of this type of risk and the subsequent measurement of it. A second course will focus on the structures banks put in place to manage interest rate risk and the various approaches to such management.

  • OBJECTIVES

    On completion of this course, you will be able to:

    Identify the key sources of interest rate risk for a banking business

    Describe how gap and duration measurements are used to quantify the extent of interest rate risk from different perspectives

  • COURSE OUTLINE

    Topic 1: Identifying Interest Rate Risk

    Combinations are the Key

    Identifying Interest Rate Risk – Assets

    o Term Loans

    o Retail Credit

    o Mortgages

    Identifying Interest Rate Risk – Liabilities

    Combinations in Action

    o Fixed vs. Variable

    o Variable vs. Variable

    Topic 2: Measuring Interest Rate Risk

    Income Gap Reporting

    Problems with Income Gap Reports

    Income vs. Value

    Calculating Market Value

    Economic Value of Equity (EVE)

    EVE- Sensitivity to Interest Rates

    Duration

    Convexity

    Some Properties of Duration

    Duration of Portfolios

    Duration Gap

    DGAP and EVE – Example

    Problems with DGAP

    Dynamic Measurement Approaches

    Scenario Analysis

  • PREREQUISITE KNOWLEDGE

  • ESTIMATED COMPLETED TIME

    75 Minutes

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