Interest Rate Risk Assignment Essay Example | Topics and Well Written Essays - 750 words

Interest Rate Risk Assignment - Essay ExampleIndeed, the belief was sold to the customer at a lower price (lower interest rate) than it could have been if it had been sold at a later time. Certainly, this is one of the simple examples, but we must consider that the nurture of the bank itself sack be directly affected by the interest rate risk, through changes in its overall pluss and liabilities protects2 and given(p) the time value of money.The repricing dislocation posture is one of the simplest used by banks to determine the amount of photo for their assets and is based on the net differences in the midst of interest rate sensitive assets and liabilities maturing at various time3). Within established time bands (one day, 1 day 3 months, 3-6 months etc. up to assets and liabilities with maturities of over 5 years), total liability values are subtracted from total asset values to evaluate a porta between the two. Each gap value thus obtained can be multiplied by a the as sumed change in interest rates in order to obtain the potential numeric expression of the impact the change in interest rates provide have on the value of that respective bandwidth (evaluated as the gap between assets and liabilities). ... Despite the fact that the repricing gap model is simple overflowing to be used by almost everybody, one of its biggest disadvantages refers exactly to this simplicity of the model. Indeed, there is practically no other variable being taking into consideration other than the difference in value between assets and liabilities within a time band. The market conditions generally impose multiple variable, such as different maturing and repricing periods4 or payments that need to be taken into consideration, so we may point out towards the fact that this model is only an approximation of the level of video of a bank to the interest rate risk.The duration gap analysis is somewhat more complex and provides more answers for a proper interest rate exposu re analysis. It focuses on managing NII or the market value of equity, recognizing the timing of cash flows5, which is something that the repricing gap model ignored. According to the homogeneous source (Koch and MacDonald), an effective duration gap analysis will include three main steps. depression of all, the bank management and analysis department will need to develop a forecast for the afterlife levels of interest rate. Subsequently, the management determined the market value for all the assets and liabilities held by the bank. Third of all, an estimation of the leaden duration of assets and of the weighted duration of liabilities is made. In order to be able to hedge the market value of the banks equity, the management will evaluate the difference between the weighted duration of assets and the weighted duration of liabilities and will set the condition that this equals to 0. Upon calculation, the bank managements conclusion will hold either an adjustment of either asset or liability weighted duration.3.a)