TAILIEUCHUNG - Lecture Financial institutions, instruments and markets (6/e): Chapter 14 - Christopher Viney

Chapter 14 - Interest rate risk measurement. In this chapter, you will learn 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, revisit financial securities repricing and interest rate risk, | Chapter 14 Interest Rate Risk Measurement 14- 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 Revisit financial securities repricing and interest rate risk Describe the interest rate risk measurement models, particularly repricing gap analysis, duration and convexity Outline internal and external interest rate risk management techniques 14- Chapter Organisation Interest Rate Risk Exposure Management Systems Assets Repriced Before Liabilities Principle (ARBL) Pricing Financial Securities Repricing Gap Analysis Duration Convexity Interest Rate Risk Management Techniques Summary 14- Interest Rate Risk Chapter 13 considered the: macro-economic context of interest rates loanable funds approach to interest rate determination theories that explain the shape of the yield curve The timing and extent of interest rate changes is unknown Interest rate risk needs to be managed 14- Interest Rate Risk (cont.) Interest rate risk takes two forms 1. Reinvestment risk Impact of a change in interest rates on a firm’s future cash flows 2. 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, . a rise in interest rates results in a fall in the value of an asset or liability, or vice versa 14- Interest Rate Risk (cont.) Interest rate risk exposures may also be described as: Direct Reinvestment and price risk Indirect Relating to the future actions of market participants, . a rise in interest rates causes borrowers to seek new loans elsewhere and/or repay existing loans Basis Occurs when pricing differentials exist between markets, . futures market and the underlying physical market 14- Chapter .

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