7Lecture8interestrateriskIV

50 2 year at 5 100 2 year at 7 50 interest rate risk

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Unformatted text preview: 50 2-year at 5% 100 2-year at 7% 50 Interest Rate Risk? If rates remain the same Same Margin If rates fall Margin falls If rates increase Margin Increases 6 Which position? Take Refinance Position Riding the Yield Curve borrow Lend Max Profit But Interest rate risk Increases especially lose if rates go up 7 2.Funding Gap /Repricing Gap/ Gap Method or Interest rate Gap • Group assets/liabilities into different time intervals based on repricing dates ~ Repricing buckets (or bins) • Define Rate Sensitive Assets (RSA) and Rate Sensitive Liabilities (RSL) as a security that will be repriced in one year or less • Define Fixed Rate Assets (FRA) and Fixed Rate Liabilities (FRL) as a security that will be repriced more than one year • Which one you need to evaluate the interest rate risk? 8 Example B/S 1-year Loan $50 DD $40 2-year Loan 25 Savings 30 3-mo T-bills 65 3-mo CD 40 3-yr T-bonds 70 6-mo CP 80 10-yrFx-r Mtg 20 1-yr TDep 20 30-yr V-r Mtg 40 2-yr TD 40 Equity 20 Repriced every 6-month 9 • RSA = • RSL = 10 • Period Gapi= RSAi-RSLi i =1-day,...
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This note was uploaded on 03/12/2014 for the course FINE 442 at McGill.

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