chapter 9 managing interest rate risk

1、 安安 徽徽 财财 经经 大大 学学Anhui University of Finance & Economics 安安 徽徽 财财 经经 大大 学学Anhui University of Finance & Economicso9.1 Static Gap Analysis o9.2 Earnings Sensitivityo9.3 Duration GAPo9.4 Market value of equity sensitivity analysis 安安 徽徽 财财 经经 大大 学学Anhui University of Finance & Economicso

2、Reinvestment rate riskn. the risk that a bank can not reinvest cash flows from assets or refinance rolled over or new liabilities at a certain rate in the futurenCost of funds versus the return on assetso Funding GAP, impact on NIIoPrice Risk n changes in interest rates will also cause a change in t

3、he value (price) of assets and liabilitiesnLonger maturity (duration) o larger change in value for a given change in interest rateso Duration GAP, impact on market value of equity 安安 徽徽 财财 经经 大大 学学Anhui University of Finance & EconomicsoStatic GAP focuses on managing net interest income in the s

4、hort run. oThe objective is typically to measure expected net interest income and then identify strategies to stabilize or improve it. oTraditional static GAP models attempt to measure how much interest rate risk a bank evidences at a fixed point in time by comparing the rate sensitivity of assets w

5、ith the rate sensitivity of liabilities. 安安 徽徽 财财 经经 大大 学学Anhui University of Finance & EconomicsoIn general, an asset or liability is normally classified as rate-sensitive with a time frame:nmaturing instrumentsnIt represents an interim, or partial, principal paymentnfloating and variable rate

6、instruments those assets and liabilities management expects to be repriced within a fixed time interval. 安安 徽徽 财财 经经 大大 学学Anhui University of Finance & Economics 3-month T-bill Federal funds sold (daily repricing) 2-year Treasury bond with semiannual coupon payments 4-year fully amortized car lo

7、an with $450 monthly payments including both principal and interest Commercial loan priced at banks prime rate plus 2 percent Are the following assets rate sensitive within a six-month time frame? 安安 徽徽 财财 经经 大大 学学Anhui University of Finance & Economics difference between RSA and RSLoMethodnGrou

8、p assets and liabilities into time buckets” according to when they mature or are expected to re-pricenCalculate GAP for each time bucket Funding GAPt = $ Value of RSAt - $ Value of RSLtowhere t = time bucket; e.g., 0-3 monthsozero gap：RSA=RSL positive gap：RSA-RSL0 negative gap: RSA-RSL1 negative gap

9、: gap ratio liabilities, ohence asset values change by more than liability values.2021-11-1331tt1.137001.1384PV 安安 徽徽 财财 经经 大大 学学Anhui University of Finance & EconomicsoDA= (683 / 974) * 2.68 + (191 / 974) * 4.97 = 2.86 yrsoDL= (614 / 906) * 1.00 + (292 / 906) * 2.80 = 1.58 yrsnDGAP = 2.86 - (90

10、6 / 974) * 1.58 = 1.36 yearsochange in the MVE as: MVE = (-1.42) x +0.01 / (1.10) x 1,000= -$12.90 安安 徽徽 财财 经经 大大 学学Anhui University of Finance & Economicso To eliminate the risk of changes in the MVE, how much must DA or DL change by?nChange DA = -1.42nChange DL = +1.42/u = 1.54 What is the min

11、imum risk position?oAn immunized security is one in which the gain from the higher reinvestment rate is just offset by the capital loss. nThis point is where your holding period equals the duration of the security.2021-11-1 DGAP = 2.88 0.92 (3.11) 02021-11-1Immunized portfolio: 1% increase in all ra

12、tes 安安 徽徽 财财 经经 大大 学学Anhui University of Finance & EconomicsProblems: What is the weighted average duration of assets?What is the banks duration gap?What is the banks weighted average cost of liabilities?What is the banks expected economic net interest income? If interest rates rise 1% for all a

13、ssets and liabilities, what is the approximate expected change in the market value of equity? 安安 徽徽 财财 经经 大大 学学Anhui University of Finance & EconomicsoManagement develops an interest rate forecast.oManagement estimates the market value of bank assets, liabilities and stockholders equity.oManagem

14、ent estimates the weighted duration of assets and weighted duration of liabilities. nThe effects of both on- and off-balance sheet items are incorporated. These estimates are used to calculate duration gap.oManagement forecasts changes in the market value of stockholders equity across different inte

15、rest rate environments. 安安 徽徽 财财 经经 大大 学学Anhui University of Finance & Economics Suppose that your bank currently operates with a duration gap of 2.2 years, which of the following will serve to reduce the banks interest rate risk?Issue a 1-year zero coupon CD to a customer and use the proceeds t

16、o buy a 3-year zero coupon Treasury bill.Sell $5 million in 1-year bullet (single payment) loans and buy 3-month T-billa. Obtain 2-year funding from the Federal Home Loan Bank and lend the proceeds overnight in the federal funds market. 安安 徽徽 财财 经经 大大 学学Anhui University of Finance & EconomicsoDG

17、AP analysis has the advantage of focusing on all cash flows from the underlying assets and liabilities and not just cash flows that are expected to arise over short time intervals. oInterest rate risk can be summarized in one measure for the entire portfolio. 安安 徽徽 财财 经经 大大 学学Anhui University of Fin

18、ance & EconomicsoMVE sensitivity analysis effectively involves the same steps as earnings sensitivity analysis.oIn MVA analysis, however, the bank focuses on:nthe relative durations of assets and liabilities, nhow much the durations change in different interest rate environments, and nwhat happe

19、ns to the market value of equity across different rate environments. 安安 徽徽 财财 经经 大大 学学Anhui University of Finance & EconomicsoPrepayments that exceed (fall short of) that expected will shorten (lengthen) duration.oA bond being called will shorten duration.oA deposit that is withdrawn early will

20、shorten duration. nA deposit that is not withdrawn as expected will lengthen duration.Interest Rates and the Business CycleThe general level of interest rates and the shape of the yield curve appear to follow the U.S. business cycle.TimeInterestRates(Percent)ExpansionContractionExpansionLong-TermRat

21、esShort-TermRatesPeakTrough 安安 徽徽 财财 经经 大大 学学Anhui University of Finance & Economics2(10.0)20.010.08.88.2(8.2)(20.4)(36.6)13.6ALCO GuidelineBoard Limit(20.0)(30.0)Change in EVE (millions of dollars)(40.0)-300-200-100+100+200+3000Shocks to Current RatesSensitivity of Economic Value of Equity meas

22、ures the change in the economic value of the corporations equity under various changes in interest rates. Rate changes are instantaneous changes from current rates. The change in economic value of equity is derived from the difference between changes in the market value of assets and changes in the

23、market value of liabilities. 安安 徽徽 财财 经经 大大 学学Anhui University of Finance & Economicsfluctuation 波动波动 Due to the fluctuation of international oil prices, domestic fuel prices have also risen.Amortized 分期偿还分期偿还The principal is amortized over five.GAP 缺口缺口 foreign exchange gap and savings gap, cul

24、tural gapperiodic gap 时期缺口时期缺口 cumulative gap 累积缺口累积缺口 安安 徽徽 财财 经经 大大 学学Anhui University of Finance & EconomicsInterim 临时的；中间的，间歇的临时的；中间的，间歇的Interim principal payments, such as the principal component of the regular monthly payment on a mortgage, are also rate sensitive.appreciate 增值增值 depreciat

25、e 贬值贬值 roll over(从到期证券中获得的资金从到期证券中获得的资金)再投资到类似的证券中再投资到类似的证券中 Although cash deposits may earn interest, however, due to their shorter tenors, or time-frames, an investor may face the risk of roll-ing over, or reinvesting his money, at lower interest rates when the deposit matures. 安安 徽徽 财财 经经 大大 学学Anhui University of Fin