today : | at : | safemode : ON
> / home / facebook / twitter / exit /
name author perms com modified label

MANAGEMENT OF INTEREST RATE RISK jeon rwxr-xr-x 2 Wednesday, July 20, 2011

Permission rw-r--r--
Author jeon
Date and Time Wednesday, July 20, 2011
          Finacial intermediaries (FIs) often mismatch the maturities of their asset and liabilities. In so doing, they expose themselves to interest rete risk. For example, in the 1980s, a large number of thrifts suffered economic insolvency (i.e., the net worth or equity of their owners was eradicated) due to major increases in interest rates. This topic discusses the Federal Reserve’s monetary policy whick is a key determinant of interest rate risk. This topic also analyzes two of the simpler methods to measure an FI’s interest rate risk: the repricing model and the maturity model. The repricing model,

          Underlying the movement of interest rates is the central bank’s monetary policy strategy. The central bank in teh United States is the Federal Reserve Bank (the Fed). Throught its daily open-market operations such as buying and selling Treasury bonds and Treasury bills, the Fed seeks to influence the money supply and the level of interest (particulary short-term interest rates).
Furthermore, if the Fed smooths or targets the level of interest rates, unexpected interest rate shocks and interest rate volatility tend to be small. Accordingly, in a low interest rate volatility environment, the risk exposure to an FI from mismatching the maturities of its asset and liabilities tends to be small.
In addition to the Fed’s impact on rates via its monetary policy strategy is the increasing level of financial market integration throughout the word. Financial market integration increases the speed of interest rate transmission omong countries, making interest rates more volatile and their control by the Federal Reserve more difficult and less certain.

Repricing of funding gap
          The difference between those asset whose interest rates will be repriced or changed over some future period (RSAs) and liabilities whose interest rates will be repriced or changed over some future period (RSLs).

          The repricing or funding gap model is essentially a book value accounting cash flow analysis of the interest revenue earned on an FI’s asset and the interest expense paid on its liabilities (or net interest income) over some particular peroid.
A bank reports the gaps in each maturity bucket (or bin) by calculating the rate sensitivity of each asset (RSA) and each liability (RSL) on its balance sheet. Rate sensitivity means that the asset or liability is repriced at or near current market interest rates within a maturity bucket. More simply, it indicates how long the FI manager must wait to change the posted interest retes on any asset or liability.

Unequal Changes in Rates on RSAs and RSLs
The section considered changes in net interest income as interest rates changed, assumsing that change in rates on RSAs was exactly equal to the change in rates on RSLs (in other word, assumming the interest rates spreed between rates on RSAs and RSLs remained uchanged).

Althought a strategy of matching asset and liability maturities moves the bank in the direction of hedging it self against interest rate risk, it is easy to show that this strategy does not aleways eliminete all interest rate risk for an FI. Indeed, we show in topic that immunization against interest rate risk required the bank to consider the following.


cepu said...

nice post ..........

Admin said...

thanks kawan atas kunjunganx :)

Post a Comment


Jayalah Indonesiaku © 2010 Science For All
VB (Vio b374k) Template design by p4r46hcyb3rn3t