Duration for the FI Balance Sheet

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

Info iconThis preview shows pages 1–6. Sign up to view the full content.

View Full Document Right Arrow Icon
Duration for the FI Balance Sheet 1 ( millions ): Assets $100 Liabilities $90 Equity $10 Total Assets $100 Total Liabilities & Equity $100 Liabilities & Equity
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
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
Background image of page 2
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].
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
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
Background image of page 4
Leverage-Adjusted Duration Gap 5 If the leverage-adjusted duration gap is positive, an increase
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 6
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 7

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

This preview shows document pages 1 - 6. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online