Essay about Ppt Ch14

Submitted By yucongaa
Words: 3871
Pages: 16

Chapter 14
Interest Rate
Risk Measurement

Copyright  2003 McGraw-Hill Australia Pty Ltd

Copyright
 2003
McGraw-Hill
Australia
PtyViney
Ltd
PPT Slides t/a Financial
Institutions,
Instruments and Markets
4/e by Christopher
Slides prepared by Anthony Stanger

1

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
Copyright  2003 McGraw-Hill Australia Pty Ltd

Copyright
 2003
McGraw-Hill
Australia
PtyViney
Ltd
PPT Slides t/a Financial
Institutions,
Instruments and Markets
4/e by Christopher
Slides prepared by Anthony Stanger

2

Chapter Organisation
14.1
14.2
14.3
14.4

Introduction
Interest Rate Risk
Exposure Management Systems
Assets Repriced Before Liabilities
Principle (ARBL)
14.5 Pricing Financial Securities

Copyright  2003 McGraw-Hill Australia Pty Ltd

Copyright
 2003
McGraw-Hill
Australia
PtyViney
Ltd
PPT Slides t/a Financial
Institutions,
Instruments and Markets
4/e by Christopher
Slides prepared by Anthony Stanger

3

Chapter Organisation (cont.)
14.6
14.7
14.8
14.9

Repricing Gap Analysis
Duration
Convexity
Interest Rate Risk Management
Techniques
14.10 Summary

Copyright  2003 McGraw-Hill Australia Pty Ltd

Copyright
 2003
McGraw-Hill
Australia
PtyViney
Ltd
PPT Slides t/a Financial
Institutions,
Instruments and Markets
4/e by Christopher
Slides prepared by Anthony Stanger

4

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
Copyright  2003 McGraw-Hill Australia Pty Ltd

Copyright
 2003
McGraw-Hill
Australia
PtyViney
Ltd
PPT Slides t/a Financial
Institutions,
Instruments and Markets
4/e by Christopher
Slides prepared by Anthony Stanger

5

Chapter Organisation
14.1
14.2
14.3
14.4

Introduction
Interest Rate Risk
Exposure Management Systems
Assets Repriced Before Liabilities
Principle (ARBL)
14.5 Pricing Financial Securities

Copyright  2003 McGraw-Hill Australia Pty Ltd

Copyright
 2003
McGraw-Hill
Australia
PtyViney
Ltd
PPT Slides t/a Financial
Institutions,
Instruments and Markets
4/e by Christopher
Slides prepared by Anthony Stanger

6

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

Copyright  2003 McGraw-Hill Australia Pty Ltd

Copyright
 2003
McGraw-Hill
Australia
PtyViney
Ltd
PPT Slides t/a Financial
Institutions,
Instruments and Markets
4/e by Christopher
Slides prepared by Anthony Stanger

7

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

Copyright  2003 McGraw-Hill Australia Pty Ltd

Copyright
 2003
McGraw-Hill
Australia
PtyViney
Ltd
PPT Slides t/a Financial
Institutions,
Instruments and Markets
4/e by Christopher
Slides prepared by Anthony Stanger

8

14.2 Interest Rate Risk (cont.)
• Interest rate risk exposures may also

be described as (cont.)


Basis


Occurs when pricing differentials exist between markets e.g. futures market and the…