Bank Financial Mgt Week 2 Lecture Slides - Full Size

Bank Financial Mgt Week 2 Lecture Slides - Full Size -...

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BUSINESS SCHOOL FINC3018 BANK FINANCIAL MANAGEMENT Week 2
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Objectives of this Week’s Session To obtain an overview of the risks that banks are exposed to: - Market Risk - Interest Rate Risk (as a subset of market risk) - Identify the significance of these risks in bank management To examine Interest Rate Risk - Repricing Model - Maturity Model
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Market Risk The risk incurred in the trading or from holding assets and liabilities in a portfolio due to changes in the underlying market for those instruments The risk has become more significant - as Banks have increased the level of trading activities undertaken - as more of the assets and liabilities in their portfolios are exposed to market variation, due to disintermediation
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When does Market Risk arise? Whenever an FI takes an open or unhedged position in a traded market or holds instruments whose value is affected by traded markets: - Bonds - Equities - FX - Derivatives - Commodities
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A More Expansive view of Market Risk The risk that a change in the market for the underlying instruments in the portfolio adversely changes the current value of the portfolio. In trading activities from both open (unhedged) positions and from imperfect correlations between market positions that are intended to offset one another.
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The different categories of Market Risk Interest Rate Sensitive Instruments Risk - Simplistically the risk of changes in the value of a fixed interest security, but can be examined in terms of the change in value of the component cashflows. - General market risk - the movement of aggregate interest rates - Specific risk - the movement of individual securities in response to specific demand and supply dynamics - This will be looked at under the heading of Interest Rate Risk later today
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The different categories of Market Risk (Cont) Foreign Exchange Sensitive Instruments - The risk of changes in the value of cashflows denominated in foreign currencies as a result of changes in exchange rates - Affected by spot exchange rate changes as well as the behavior of domestic and foreign interest rates - This will be examined in week 7
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The different categories of Market Risk (Cont) Equity Risk - The risk of changes in value of an equity or a portfolio of equities - General risk refers to movements in the market as a whole - Specific or “idiosyncratic” risk refer to the value changes of the specific stock
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The different categories of Market Risk (Cont) Commodity Risk - The price risk of commodities - Heavily impacted by supply - Tend to be characterised by fluctuating levels of market liquidity and hence tend to be more volatile that most traded financial
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This note was uploaded on 11/05/2011 for the course FINC 3018 taught by Professor Paulmartin during the Two '11 term at University of Sydney.

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Bank Financial Mgt Week 2 Lecture Slides - Full Size -...

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