·
Interest rate risk is the
exposure of a bank's financial condition to adverse movements in interest
rates.
·
Gap: The gap is the
difference between the amount of assets and liabilities on which the interest
rates are reset during a given period.
·
Interest rate risk refers
to volatility in Net Interest Income (NiI) or in variations in Net Interest
Margin (NIM)
·
The degree of basis risk is
fairly high in respect of banks that create composite assets out of composite
liabilities.
·
The risk that the interest
rate of different assets and liabilities may change in different magnitudes is
called basis risk.
·
When assets and liabilities
fall due to repricing in different periods, they can create a mismatch. Such a
mismatch or gap may lead to gain or loss depending upon how interest rate in
the market tend to move.
·
The degree of basis risk is
fairly high in respect of banks that create composite assets out of composite
liabilities
·
When the variation in
market interest rate causes the Nil to expand, the banks have experienced a favourable
basis shift and if the interest rate movement causes the Nil to contract, the
basis has moved against the bank.
·
An yield curve is a line on
a graph plotting the yield of all maturities of a particular instrument
·
Price risk occurs when
assets are sold before their maturity dates.
·
The price risk is closely
associated with the trading book which is created for making profit out of
short-term movements in interest rates.
·
Uncertainty with regard to
interest rate at which the future cash flows can be reinvested is called
reinvestment risk.
·
When the interest rate goes
up, the bonds price decreases
·
When the interest rate
declines the bond price increases resulting in a capital gain but the realised
compound yield decreases because of lower coupon reinvestment income.
·
Duration is a measure of
the percentage change in the economic value of a position that will occur,
given a small change in the level of interest rates.
·
Higher duration implies
that a given change in the level of interest rates will have a larger impact on
economic value.
·
Interest Rate Sensitive
Gap: Interest Rate Sensitive Assets(RSA) - Interest Rate Sensitive Liabilities
(RSL).
·
Positive Gap or Asset
Sensitive Gap - RSA - RSL > 0 & Negative Gap or Liability Sensitive -
RSA - RSL < 0
