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Interest Rate Risk And Management

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Interest rate risk management for banks under Basel II, presentation by Christine Brown, Department of Finance , The University of Melbourne, Shanghai, December 8-12, 2008

Economy & FinanceBusiness
1 of 19
Interest Rate Risk Management Christine Brown Associate Professor Department of Finance The University of Melbourne
Plan ,[object Object],[object Object],[object Object],[object Object],[object Object]
What is Interest Rate Risk? ,[object Object],[object Object],[object Object],[object Object],[object Object]
Where does IRR come from? ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Regulation ,[object Object],[object Object],[object Object],[object Object]
Principles for Interest rate Risk Management ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Techniques for Interest Rate Risk Measurement ,[object Object],IRR measurement Earnings Economic value Dollar gap or Maturity gap Duration gap Simulation Static simulation
Simple calculations of IRR ,[object Object],[object Object],[object Object],[object Object],[object Object]
Simple approaches - Gap ,[object Object],[object Object],[object Object]
[object Object],Traditional Gap analysis ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Example (months) Reset date 0-3 3-6 6-12 12-24 24+ Assets 80 0 0 70 0 Liabilities 20 130 0 0 0 Gap +60 -130 0 +70 0 Cumulative Gap +60 -70 -70 0 0
[object Object],[object Object],Interpreting the Gap interest income interest expenses time rate change
Problems with Gap Analysis ,[object Object],[object Object],[object Object],[object Object],[object Object]
[object Object],[object Object],[object Object],Gapping and equity value
Duration based approach ,[object Object],[object Object],[object Object]
Duration - A Graphic Depiction time 0 asset cash flows present value of cash flows 1 2 3 4 5 6 Duration
Duration and Bond Price Sensitivity ,[object Object],[object Object],[object Object],[object Object],[object Object]
Simulation approaches ,[object Object],[object Object],[object Object],[object Object],[object Object]
Conclusions ,[object Object],[object Object],[object Object]

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Interest Rate Risk And Management

  • 1. Interest Rate Risk Management Christine Brown Associate Professor Department of Finance The University of Melbourne
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  • 11. Example (months) Reset date 0-3 3-6 6-12 12-24 24+ Assets 80 0 0 70 0 Liabilities 20 130 0 0 0 Gap +60 -130 0 +70 0 Cumulative Gap +60 -70 -70 0 0
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  • 16. Duration - A Graphic Depiction time 0 asset cash flows present value of cash flows 1 2 3 4 5 6 Duration
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