Duration: 3 days
 An ALM Framework for Managing Interest Rate Risk
 GAP and Duration GAP Analysis
 Customer Behaviour and Interest Rate Risk
 Measuring Interest Rate Risk on NonMaturing Products
 Measuring and Managing Prepayment Risk
 Measuring and Managing ValueatRisk
 Using Derivatives to Hedge Interest Rate Risk
 Basel Sound Interest Rate Risk Management Practices
The objective of this seminar is to give you a good understanding of tools and techniques for
measuring and managing interest rate risk.
We start with a general introduction to interest rate risk and explain how this type of risk should
be measured and managed within an assetliability framework. We explain important concepts such as
margin, spread, leverage, surplus, and balance sheet risk. We look at the balance sheets of
“typical” institutions and discuss the funding/investment requirements and constraints that arise
from the business nature of these institutions.
We then take a closer look at methods for measuring interest rate risk. We show how GAP and Dynamic
GAP simulations can be used to identify repricing and spread risk, and we explain marktomarket
based measures such as Duration GAP, “Surplus”, “SurplusatRisk”, and “ValueatRisk”. We also
explain how the interest rate and spread risk on nonmaturing assets and liabilities (including
“core deposits”) can be estimated and integrated into the overall assessment of assetliability
risk. Further, we explain how interest rate risk on optional cash flows such as prepayable
mortgages can be estimated using prepayment models and optionadjusted analysis.
After this, we present, explain and demonstrate a variety of methods for managing interest rate
risk at the micro and macro levels. These methods include immunization, contingent immunization,
surplus management and the use of derivate instruments such as futures, swaps and interest rate
options for synthetic risk transfer. We discuss some of the practical problems arising from the use
of these methods, including some accounting considerations related to the accounting standards (IAS
39 and FAS 133).
Finally, we discuss sound interest rate risk management practices (Basel Committee guidelines). We
suggest appropriate risk management policies and procedures, and we discuss organizational
considerations and monitoring, reporting, and internal controls requirements.
Day One
09.00  09.15 Welcome and Introduction
09.15  12.00 General Introduction to Interest Rate Risk
 What is Interest Rate Risk?

Profitability and Interest Rate Risk
 Margins, leverage and ROE
 Maturity transformation risk
 Spread risk

Interest Rate Risk in an ALM Framework
 Assetliability risk
 Surplus and surplus risk
Measuring Interest Rate Risk (1)
 NPV Risk vs. “Repricing” Risk

GAP Analysis
 Static GAP
 Dynamic GAP
 Case: GAP analysis in “NoHope Bank”
 Exercises
12.00  13.00 Lunch
13.00  16.30 Measuring Interest Rate Risk (2)

Simulation Method
 Simulating NII
 Simulating effect of product mix and pricing
 Monte Carlo simulation

Duration Analysis
 Duration explained
 Duration GAP

Yield Curve Analysis
 Projection of repricing rates
 Key rate duration
 Using Factor Models
 Case: Duration Analysis and Factor Analysis in NoHope Bank
 Exercises
Day Two
09.00  09.15 Recap
09.15  12.00 Measuring Interest Rate Risk (3)

Measuring Interest Risk of NonMaturing Assets and Liabilities
 Saving accounts, demand deposits, mortgages etc.
 The importance of “core deposits”
 Assessing the impact of structural changes on how customers withdraw their
money or choose their amortization schedule

PrePayment Analysis
 Using OAS analysis to evaluate interest rate risk of prepayable mortgages

ValueatRisk Analysis
 Calculating VaR for interest sensitive assets and liabilities
 Case: Analyzing Optional Cash Flows and VaR in “NoHope Bank”
 Exercises
12.00  13.00 Lunch
13.00  16.30 Managing Interest Rate Risk (1)

Structural Management
 A/L mix and pricing
 Balance sheet reengineering

Strategies for Interest Rate Risk in Portfolio Management
 Matching
 Classic immunization
 Contingent immunization
 Surplus management
 Factor immunization
 Case: Immunization Strategies in “NoHope Bank”
 Exercises
Day Three
09.00  09.15 Recap
09.15  12.00 Managing Interest Rate Risk (2)
 Overview of Derivative Instruments for Hedging of Interest Rate Risk
 Using FRAs and Futures to Manage Repricing Risk
 Using Interest Rate Swaps to Hedge Fixed and Floating Rate Assets and Liabilities
Loans
 Using “Macro Swaps” to Hedge Loan and Deposit Portfolios
 Using Interest Rate Options to Cap Funding Costs
 Managing PrePayment Risk
 Managing MultiDimensional IRR

Accounting Issues in Using Derivatives for Hedging of IRR
 Case: Using Derivatives in “NoHope Bank”
12.00  13.00 Lunch
13.00  16.30 Sound Interest Rate Risk Management Practices
 Interest Rate Risk Management Policies and Procedures

Organizational Considerations in Interest Rate Risk Management
 Management structure (board and senior managers)
 Lines of responsibility and authority for managing interest rate risk
 Interest Rate Risk Monitoring and Reporting
 Capital Adequacy and Disclosure of Interest Rate Risk
 Internal Controls and Independent Audits
Evaluation and Termination of the Seminar