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Interest Rate Risk Management

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 Non-Maturing Products
  • Measuring and Managing Prepayment Risk
  • Measuring and Managing Value-at-Risk
  • 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 asset-liability 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 mark-to-market based measures such as Duration GAP, “Surplus”, “Surplus-at-Risk”, and “Value-at-Risk”. We also explain how the interest rate and spread risk on non-maturing assets and liabilities (including “core deposits”) can be estimated and integrated into the overall assessment of asset-liability risk. Further, we explain how interest rate risk on optional cash flows such as prepayable mortgages can be estimated using pre-payment models and option-adjusted 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
    • Asset-liability 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 re-pricing 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 Non-Maturing 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
  • Pre-Payment Analysis
    • Using OAS analysis to evaluate interest rate risk of pre-payable mortgages
  • Value-at-Risk 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 re-engineering
  • 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 Re-pricing 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 Pre-Payment Risk
  • Managing Multi-Dimensional IRR
  • Accounting Issues in Using Derivatives for Hedging of IRR
    • “Hedge accounting”
  • 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