BK6 - MANA130107 Bank Management 1 Lecture Six...

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Unformatted text preview: MANA130107 Bank Management 1 Lecture Six Assets-Liability Management (chap 9 ) Topics in Commercial Bank Management MANA130107 Bank Management 2 Assets-Liability Management ¡ Topics covered in this lecture ¢ Interest rate caps, floors and collars ¢ Securitization : Impacts and Risks ¢ Sale of Loans ¢ Standby Credits ¢ Credit Derivatives and CDOs MANA130107 Bank Management 3 Interest Rate Caps ¡ Interest Rate Cap ¢ An agreement between two counterparties that limits the buyer’s interest rate exposure to a maximum limit ¢ Borrowers are assured a loan rate will NOT rise above the cap rate. Same as a call option on an interest rate ¢ Protects the holder from rising IR with a premiuim ¢ Mostly used by banks funding longer-term fixed- rate assets with shorter term flexible rate liabilities, OR banks with a large bond portfolio that loss value when IR rises. MANA130107 Bank Management 4 Interest Rate Floors ¡ Interest Rate Floor ¢ An agreement between two counterparties that limits the buyer’s interest rate exposure to a minimum rate ¢ For lenders, it sets the lowest IR a borrower is allowed to pay, especially on a flexible-rate loan in periods of falling IR ¢ Buying an interest rate floor is the same as purchasing a put option on an interest rate, which guarantee the lender a floor of return. ¢ Mostly used to hedge banks who funds short-term float-rate assets with long-term fixed-rate liabilities. MANA130107 Bank Management 5 Interest Rate Collar ¡ Interest Rate Collar ¢ Set the maximum and minimum IR that may be assessed on a flexible-rate Loan. It creates a band within which the buyer’s effective interest rate fluctuates ¢ The simultaneous purchase of an interest rate cap and sale of an interest rate floor and the collar purchase pays a premium for the cap and receive a premium for accepting the floor. ¢ Caps, floors and collars create large fee incomes with credit risk and IR risk as well. MANA130107 Bank Management 6 Fixed Rate Loans Bank 3-Month LIBOR- 0.25% 3-Month LIBOR>3.5% Fee: (0.50%) per year Receive when Deposits Counterparty Fixed 7.00% Rates Fall 100 Basis Points Balance Sheet Flows: Loan Deposit Spread 7.00% (2.75%) 4.25% 7.00% (1.75%) 5.25% 7.00% (3.75%) 3.25% 0.00% (0.50%) (0.50%) 0.00% (0.50%) (0.50%) 0.50% (0.50%) 0.00% 3.75% 4.75% 3.25% Cap Flows: Payout Fee Amort. Spread Margin Rates Rise 100 Basis Points LIBOR3.00% LIBOR2.00% LIBOR4.00% Current Rates Constant Buy Cap to Hedge Balance Sheet Rate Risk of Loss from Rising Rates Cap on 3-Month LIBOR at 3.5% MANA130107 Bank Management 7 Rates Fall 100 Basis Points Balance Sheet Flows: Loan Deposit Spread 6.50% (3.75%) 2.75% 5.50% (3.75%) 1.75% 7.50% (3.75%) 3.75% 0.00% (0.30%) (0.30%) 0.50% (0.30%) 0.20% 0.00% (0.30%) (0.30%) 2.45% 1.95% 3.45% Floor Flows: Payout Fee Amort....
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BK6 - MANA130107 Bank Management 1 Lecture Six...

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