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Chapter 14 - Interest rate risk measurement. Upon completion of this lesson, the successful participant will be able to: Describe interest rate risk and its forms, identify the components of an interest rate risk exposure management system, explain the interest rate risk management principle of asset repricing before liabilities,. | Chapter 14 Interest Rate Risk Measurement Learning Objectives Describe interest rate risk and its forms Identify the components of an interest rate risk exposure management system Explain the interest rate risk management principle of asset repricing before liabilities Describe the interest rate risk measurement models repricing gap analysis, duration (and convexity) Outline internal and external interest rate risk management techniques Chapter Organisation 14.1 Introduction 14.2 Interest Rate Risk 14.3 Exposure Management Systems 14.4 Assets Repriced Before Liabilities Principle (ARBL) 14.5 Pricing Financial Securities Chapter Organisation (cont.) 14.6 Repricing Gap Analysis 14.7 Duration 14.8 Convexity 14.9 Interest Rate Risk Management Techniques 14.10 Summary 14.1 Introduction Chapter 13 considered the Macro-economic context of interest rates Loanable funds approach to interest rate determination A number of theories that explain the shape of the yield curve Unknown is the timing | Chapter 14 Interest Rate Risk Measurement Learning Objectives Describe interest rate risk and its forms Identify the components of an interest rate risk exposure management system Explain the interest rate risk management principle of asset repricing before liabilities Describe the interest rate risk measurement models repricing gap analysis, duration (and convexity) Outline internal and external interest rate risk management techniques Chapter Organisation 14.1 Introduction 14.2 Interest Rate Risk 14.3 Exposure Management Systems 14.4 Assets Repriced Before Liabilities Principle (ARBL) 14.5 Pricing Financial Securities Chapter Organisation (cont.) 14.6 Repricing Gap Analysis 14.7 Duration 14.8 Convexity 14.9 Interest Rate Risk Management Techniques 14.10 Summary 14.1 Introduction Chapter 13 considered the Macro-economic context of interest rates Loanable funds approach to interest rate determination A number of theories that explain the shape of the yield curve Unknown is the timing and extent of interest rate changes Interest rate risk needs to be managed Chapter Organisation 14.1 Introduction 14.2 Interest Rate Risk 14.3 Exposure Management Systems 14.4 Assets Repriced Before Liabilities Principle (ARBL) 14.5 Pricing Financial Securities 14.2 Interest Rate Risk Interest rate risk takes two forms Reinvestment risk Impact of a change in interest rates on a firm’s future cash flows Price risk Impact of a change in interest rates on the value of a firm’s assets and liabilities An inverse relationship exists between interest rates and security prices i.e. a rise in interest rates results in a fall in the value of an asset or liability, or vice versa 14.2 Interest Rate Risk (cont.) Interest rate risk exposures may also be described as Direct Reinvestment and price risk Indirect Relate to the future actions of market participants e.g. a rise in interest rates causes borrowers to seek new loans elsewhere and/or repay existing loans 14.2 Interest Rate Risk (cont.) .
