Models for Interest Rate Risk Essay

Interest find is the possibility of unexpected adverse channels in participation revenues and expenses. It can be shown that hobby send changes ar un call inable just about 100%. They depend on fiscal policy supply and demand, inflation and so on These in turn depend on many other factors. So how do financial institutions manage the risk of move touch on valuates give that they cannot predict it? The immunization of a portfolio against come to rate risk means that the portfolio provide uncomplete gain nor lose value if matter to rates change.In this essay we will look at some of the dissimilar seats used by financial institutions for managing interest rate risk. They ar the re-pricing model, the matureness model and the duration model. We will describe them and judge the comparative advantages and disadvantages each model assumes. for the first while we consider the re-pricing model. It is a balance cruise where assets and liabilities argon grouped according to the snip catamenias in which the different assets and liabilities are rate clear.Assets or liabilities are rate sensitive within a given time period if the values of each are subject to receiving a different interest rate should market rates change. These groupings are referred to as maturity buckets. Then faulting analysis is conducted where the rate sensitive liabilities are subtracted from rate sensitive assets for each maturity bucket. This is called the GAP. It can be shown that GAP * interest change = net interest income (or profit) change or the interest margin. We can in any case calculate the cumulative gap(CGAP) by adding up the gaps in the brackets over a period of time, for example 1 year.