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Week 3 Lecture Summary - Lecture 3 Interest Rate Risk...

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Lecture 3 Interest Rate Risk Lecture Summary Last Week Net Interest Margin = Spread = difference between average lending rate and average borrowing rate = Interest Rate Risk Asset transformation results in a mismatch of asset and liability maturities Change in interest rate exposes bank to interest rate risk o Net income o Net worth (market value of equity) Repricing Model Repricing model based on book values o Mainly used by smaller FIs Identify assets and liabilities to be repriced in future period o Rate sensitive assets (RSA) e.g. short term loans, three month treasury bills o Rate sensitive liabilities (RSL) e.g. three month CDs, six month commercial papers (high credit rating) o RSA < RSL negative gap refinancing risk o RSA > RSL positive gap reinvestment risk In addition to CGAP effects there are also spread effects o Change in spread is always positively related to NII o If negative, cannot tell change in NII without numbers
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