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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
If rates increase
Margin Increases 6 Which position?
Take Refinance Position
Yield Curve borrow Lend Max Profit
Interest rate risk
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
1-year Loan $50 DD
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
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.