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Chap02 Management of Interest Rate Risk
Chap02 Management of Interest Rate Risk
in banks
Meaning
Interest rate risk: It is the chance that an unexpected change
in interest rates will negatively effect the value of an
investment.
A bank main source of profit is converting the liabilities of
deposits and borrowings into the assets of loans and securities.
It profits by paying a lower interest on its liabilities than it
earn on its assets.
The difference in these rates is the net interest margin.
Sources of Interest Rate
Risk
Re-pricing risk
Basis risk
Yield curve
risk
This risk arises from holding the assets and liabilities with
different principal amounts, maturity, or re-pricing dates, there
by creating exposure to unexpected changes in the interest
rates.
Example:
Liability Asset Result
3 month deposits 5 year bonds Liability sensitive