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Interest Rate Risk Management Overview

This document discusses interest rate risk management in banks. It defines interest rate risk as exposure to adverse movements in interest rates. It also describes gap as the difference between interest-resetting assets and liabilities over a period. Additionally, it discusses basis risk as the risk of interest rates changing by different amounts for different assets and liabilities. Duration is defined as the percentage change in economic value from a small change in interest rates.

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Kaushik Roy
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20 views1 page

Interest Rate Risk Management Overview

This document discusses interest rate risk management in banks. It defines interest rate risk as exposure to adverse movements in interest rates. It also describes gap as the difference between interest-resetting assets and liabilities over a period. Additionally, it discusses basis risk as the risk of interest rates changing by different amounts for different assets and liabilities. Duration is defined as the percentage change in economic value from a small change in interest rates.

Uploaded by

Kaushik Roy
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd

Unit 27:-Interest Rate Risk Management

October 17, 2016

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 Interest rate risk is the exposure of a bank’s financial condition to adverse movements in
interest rates.
 Gap: The gap is the difference between the amount of assets and liabilities on which the
interest rates are reset during a given period.
 Interest rate risk refers to volatility in Net Interest Income (NiI) or in variations in Net
Interest Margin (NIM)
 The degree of basis risk is fairly high in respect of banks that create composite assets out
of composite liabilities.
 The risk that the interest rate of different assets and liabilities may change in different
magnitudes is called basis risk.
 When assets and liabilities fall due to repricing in different periods, they can create a
mismatch. Such a mismatch or gap may lead to gain or loss depending upon how interest
rate in the market tend to move.
 The degree of basis risk is fairly high in respect of banks that create composite assets out
of composite liabilities
 When the variation in market interest rate causes the Nil to expand, the banks have
experienced a favourable basis shift and if the interest rate movement causes the Nil to
contract, the basis has moved against the bank.
 An yield curve is a line on a graph plotting the yield of all maturities of a particular
instrument
 Price risk occurs when assets are sold before their maturity dates.
 The price risk is closely associated with the trading book which is created for making
profit out of short-term movements in interest rates.
 Uncertainty with regard to interest rate at which the future cash flows can be reinvested is
called reinvestment risk.
 When the interest rate goes up, the bonds price decreases
 When the interest rate declines the bond price increases resulting in a capital gain but the
realised compound yield decreases because of lower coupon reinvestment income.
 Duration is a measure of the percentage change in the economic value of a position that
will occur, given a small change in the level of interest rates.
 Higher duration implies that a given change in the level of interest rates will have a larger
impact on economic value.
 Interest Rate Sensitive Gap: Interest Rate Sensitive Assets(RSA) – Interest Rate
Sensitive Liabilities (RSL).
 Positive Gap or Asset Sensitive Gap – RSA – RSL > 0 & Negative Gap or Liability
Sensitive – RSA – RSL < 0

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