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1、 CHAPTER FOURRisk Management for changing interest rates: asset-liability management and duration techniquesKey topicsAsset, Liability, and Funds ManagementMarket Rates and Interest Rate RiskThe Goals of Interest Rate HedgingInterest-Sensitive Gap ManagementDuration Gap ManagementLimitations of Inte
2、rest Rate Risk Management TechniquesAsset-Liability Management StrategiesAsset Management StrategyPrevailed Before 1960s.This view held that the amount and kinds of deposits and the volume of other borrowed funds were largely determined by its customers. The key decision area for banker was the asse
3、ts.Liability Management StrategyPrevailed in the 1960s.Confronted with fluctuating interest rates and intense competition for funds , bankers began to devote greater attentions to opening up new sources of funding and monitoring the mix and cost of their deposit and nondeposit liabilities.Funds Mana
4、gement StrategyThis view has began to prevail since 1970s.A more balanced approach to asset-liability management. Several key objectives:Management should exercise as much control as possible over the volume, mix, and return or cost of both assets and liabilities.Management control over assets must
5、be coordinated with its control over liabilities.Revenues and costs arise from both sides of the balance sheet.Interest Rate RiskPrice Risk When Interest Rates Rise, the Market Value of the Bond or Asset FallsReinvestment RiskWhen Interest Rates Fall, the Coupon Payments on the Bond are Reinvested a
6、t Lower RatesInterest Rate Risk for Banks(PrinciplesforthemanagementofIntenseRateRisk,1997)重新定价风险重新定价风险 （Repricing Risk）基差风险（基差风险（Basis Risk）收益率曲线风险（收益率曲线风险（Yield Curve Risk）期权风险（期权风险（Optionality）Measurement of interest RatesYield to Maturity (YTM)The discount rate that equalizes the current market
7、value of a loan or security with the expected stream of future income payments that the loan or security will generate.Where: CF is the expected cash flowComponents of Interest RatesVarious Risk PremiumsDefault Risk Inflation Risk Liquidity RiskCall RiskRisk premiumRisk-free real interest rateNomina
8、l market rateYield curvesThe graphic picture of how interest rates vary with different maturities of loans viewed at a single point in time (and assuming that all other factors, such as credit risk, are held constant) is called a yield curve.Most lending institutions experience a positive maturity g
9、ap, so they prefer to upward-sloping yield curve, not horizontal or downward-sloping yield curve.Modern financial theory tends to associate upward-sloping yield curves with rising interest rates and with expansion in the economy, a negatively sloped yield curve with falling interest rates and with r
10、ecession in economy.Goal of Interest Rate Hedging One Important Goal of Interest Rate Hedging is to Insulate the Bank from the Damaging Effects of Fluctuating Interest Rates.Management must concentrate on those interest-sensitive assets and liabilities, including loans and investments on the asset s
11、ide and borrowings on the liability side.Interest-Sensitive Gap Measurements(1) Interest-Sensitive Gap = Interest-Sensitive Assets - InteresAsset-sensitive (positive) gap = Interest-Sensitive Ast Sensitive Lsets iabili ties - Interest Sensitive Liabilities 0Liability-sensitive (negative) gap = Inter
12、est-Sensitive Assets - Interest Sensitive Liabilities 0 means asset sensitive; b. Relative IS Gap 1 means asset sensitive; b. ISetsInterest SeR DL(L/A)RiseFallDecreaseIncreaseNegativeDA DL(L/A)RiseFallDecreaseIncreaseZeroDA =DL(L/A)RiseFallDecreaseIncreaseLimitations of Duration Gap ManagementFindin
13、g assets and liabilities of the same duration can be difficult.Some assets and liabilities may have patterns of cash flows that are not well defined.Customer prepayments may distort the expected cash flows in duration.Customer defaults may distort the expected cash flows in duration.Convexity can cause problems .HomeworksKey wordsYield to maturity, yield curve, asset-sensitive gap, liability-sensitive gap, duration No.8No.9No.11No.12No.15No.16
