Interest Rat Risk

Question 1

challenges managing interest rate risk - market volatility

Answer 1

market volatility - fluctuating interest rates, driven by central bank policies and global economic conditions

Question 2

challenges in managing interest rate risk - asset liability mismatch

Answer 2

mis match in banks assets and liabilities can create exposure known as refinancing risk and reinvestment risk

Question 3

refinancing risk

Answer 3

liabilities have shorter maturities than assetsr

Question 4

reinvestment risk

Answer 4

assets have shorter maturities than liabilities

Question 5

challenges in managing interest rate risk - hedging costs

Answer 5

using hedging strategies can be costly balancing risk and these costs can be a challenge

Question 6

challenges in managing interest rate risk - regulatory requirements

Answer 6

BASEL3 III accords have pre-set capital requirements which can affect a companies interest rate risk strategies

Question 7

Managing interest rate risk - gap analysis and duration matching

Answer 7

regularly conduct analysis mismatches between maturities of assets and labilities

Question 8

3 way you can make duration gap = 0

Answer 8

change duration of assets

change duration of labilities

change the assets to liability ratio

Question 9

Managing interest rate risk - hedging techniques

Answer 9

using financial derivatives trading - buying and selling contracts

Question 10

when would you buy a derivative contract

Answer 10

when you want to protect against interest rate rise

Question 11

when would you sell a derivative contract

Answer 11

to protect against interest rate decline

Question 12

managing interest rate risk - diversification

Answer 12

avoiding concentration i areas sensitive to interest rate changes

Question 13

managing interest rate risk - stress and scenario

Answer 13

Using techniques to see the affects of extreme variations in interest rates

Question 14

managing interest rate risk - robust framework

Answer 14

have comprehensive framework including procedures and risk tolerance to ensure a set standard across the bank

Question 15

issues with the duration model

Answer 15

linear model that get less accurate with bigger rate changes

Question 16

silicone valley bank closure

Answer 16

closed due to the bank receiving a rapid increase in deposits over the COVID-19 pandemic - they then bought government backed T-bills, but rates increased making the bonds worth less - as well as this deposits began to fall leading to bank runs

Question 17

challenges of managing interest rate risk (4)

Answer 17

1. market volatility
2. asset and liability mismatch
3. hedging costs
4. duration mismatch
5. regulatory standards

Question 18

managing interest rate risk

Answer 18

1. duration matching analysis
2. hedging
3. diversification
4. stress and scenario analysis
5. having robust frameworks