Portfolio Duration Gap Risk Mgmt

Portfolio Duration Gap Risk Mgmt - Portfolio Duration Gap...

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Portfolio Duration Gap Risk Mgmt 1 The first step is to separately calculate the weighted-average duration for the portfolio assets and liabilities. The duration of the portfolio is the market-value, weighted-average of the individual durations on Suppose the FI calculates duration at: DA = 5-years and DL = 3-years Assets $100.00 Liabilities $90.00 Equity $10.00 Total Assets $100.00 Total Liabilities & Equity $100.00 Liabilities & Equity
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2 The FI Manager calculates the potential loss: E = -[ DA – DLk] [A] [ R/(1+R)] ∆E = -[5 - (3)(.9)] x ($100 million) x (.01/1.1) = $- 2.09 million If rates changed by 1%, the FI could lose $2.09 million. Using the formula, ΔP/P = (-D) [ΔR/(1+R)], Assets $100.00 Liabilities $90.00 $95.45 Liabilities $87.54 Equity $10.00 $7.91 Total Assets $100.00 Total Liabilities & Equity $100.00 $95.45 Total Liabilities & Equity $95.45 Liabilities & Equity Portfolio Duration Gap Risk Mgmt
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3 To counter this impact, the FI Manager could reduce the leverage-adjusted duration gap to zero: E = - [ DA – DL k ] [ A ] [ R/(1+R)] = 0 years ∆E = - (0 ) ( A )( R/(1+R)) = 0 years
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Portfolio Duration Gap Risk Mgmt - Portfolio Duration Gap...

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