notes 11-5-09 - 171A CH24 Risk Management FI much of assets...

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171A CH24 Risk Management FI – much of assets / liabilities are securities (loans and deposits) Effected by interest rates – major source of risk - Income - Value of assets / Liabs Two popular methods of measuring impart of interest rates Identify those that are interest sensitive If you know what is going to happen when the interest rate change, you could make a lot of money. Income-gap approach Identify the assets / liabs. Which are interest rates sensitive I = (RSA – RSL) * i To avoid the lost in the change in interest rate, you need to either decrease the RSL or increase the RSA Income = revenue – cost Book value accounting approach to interest rates Duration-gap approach Impact of interest rate change on assets (On equity (or gap) of financial institution Duration = - % change in price / ( i / 1+ i) A = L + E A = L + E If you want to decrease the risk, make the duration-gap = 0 CH15 Why do Financial Institutions exist? Stocks are lowest
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notes 11-5-09 - 171A CH24 Risk Management FI much of assets...

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