The purpose of this seminar is to give you a good understanding of tools and techniques for measuring, managing and reporting interest rate risk in financial institutions.
We start with a general introduction to interest rate risk and explain the sources and effects of this type of risk. 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 also discuss the challenges and opportunities of risk management in an environment of extremely low interest rates, and we give an overview of regulatory requirements for interest rate management under the Basel III framework.
We then take a closer look at methods for measuring interest rate risk in the banking and trading book. We show how GAP and Dynamic GAP simulations can be used to identify repricing and spread risk. We also explain how the interest rate and spread risk on non-maturing assets and liabilities (including "core deposits") can be estimated and translated into the risk of a replicating portfolio and how interest rate risk on optional cash flows such as prepayable mortgages can be estimated using pre-payment models and option-adjusted analysis.
Further, we explain and demonstrate how "duration GAP" analysis is used to measure "equity" risk and how measures such as "Value-at-Risk" and "Expected Shortfall" are calculated as summary measures of interest rate risk across trading positions.
Finally, we explain and demonstrate a variety of methods and tools 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.
