Duration for the FI Balance Sheet

Duration for the FI Balance Sheet - Duration for the FI...

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Duration for the FI Balance Sheet 1 ( millions ): Assets \$100 Liabilities \$90 Equity \$10 Total Assets \$100 Total Liabilities & Equity \$100 Liabilities & Equity

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Duration for the FI Balance Sheet 2 Given that: ∆E = ∆A - ∆L and ΔP = (-D) (P) [ΔR/(1+R)] In the same manner used to determine the change in bond prices, we can find the change in value of equity for a portfolio using duration: E = -[ DA – DL k ] [A] [ R/(1+R)] k = L/A, and is a measure of leverage
Duration for the FI Balance Sheet 3 The formula can be expressed in words, as follows: E = -[ DA – DL k ] [ A ] [ R/(1+R)] The change in Equity is equal to the negative of the [Leverage- Adjusted Duration Gap]  ×  [Asset Size]  ×   [Interest Rate Shock].

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Duration for the FI Balance Sheet 4 The FI calculates the potential loss from three sources: E = -[ DA – DL k ] [ A ] [ R/(1+R)] 1. Leverage-Adjusted Duration Gap 1 2 3
Leverage-Adjusted Duration Gap 5 If the leverage-adjusted duration gap is positive, an increase

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Duration for the FI Balance Sheet - Duration for the FI...

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