7Lecture8interestrateriskIV

dollar size of gap between book value of assets and

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Unformatted text preview: 3-day…. = dollar size of gap between book value of assets and liabilities in maturity bucket i • Cumulative Gap = ∑ i Period Gapi 11 • Value rate sensitivity on Net Interest Income (Rate sensitivity means time to repricing) ΔNII i = Gapi x Δ ri i =1-day,3-day…. Higher gap ► Higher the insterest rate risk If Gap>0 Asset Sensitive Position (RSA>RSL) If rates increase ► NII If rates decrease ► NII If Gap<0 Liability Sensitive Position (RSA<RSL) If rates increase ► NII If rates descrease ► NII 12 Applying the Repricing Model ∆ NIIi = (GAPi) ∆ Ri = (RSAi - RSLi) ∆ ri Example: In the 3-month bucket, gap is…… If rates rise by 1%, ∆ NIIi = 13 If we consider the cumulative 1-year gap, CGAP= $15 mln ∆ NIIi = (CGAPi) ∆ ri = T ≤ 3-month 3-month < T ≤ 6-month 6-month< T≤1-year 14 CGAP Ratio • May be useful to express CGAP in ratio form as, CGAP/Assets. Provides direction of exposure and Scale of the exposure. • Example: • CGAP/A = $15 million / $270 million = 0.056, or 5.6 percent. Reminder? Profitability, Liquidity, Interest rate risk 15 Unequal...
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This note was uploaded on 03/12/2014 for the course FINE 442 at McGill.

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