hedging interest rate risk with forward contracts

... FX forwards: definition, characteristics and features  Uses of FX forwards – Example 1: Hedging with forwards – Example 2: Deriving the forward rate  Problems and risks  Accounting for forwards ... International Bu siness Strategies, LLC Characteristics and Features of FX Forwards Forward Exchange Rates: “The Iron-Clad Law”  Forward exchange rates are different from spot rates, but they are ... months – Exposure to FX risk: What will be exchange rate HRK/EUR in three months?? Hedging Instrument  Bank buys 1,000,000 EUR forward at forward rate of 7.3750 – FX risk: Company is protected...

Ngày tải lên: 30/11/2016, 22:30

Ngày tải lên: 15/02/2014, 05:20

... potential changes in market interest rates and a target or range for performance metrics Institutions with significant exposures to basis risk, yield curve risk or positions with explicit or embedded ... effective process for managing interest rate risk The level of structure and formality in this process should be commensurate with the activities and level of risk approved by senior management ... GUIDANCE ON INTEREST RATE RISK Federal Deposit Insurance Corporation, Federal Reserve Board and Office of the Comptroller of the Currency: Interagency Policy Statement on Interest Rate Risk http://www.fdic.gov/news/news/financial/1996/fil9652.pdf...

Ngày tải lên: 15/02/2014, 05:20

... to interest rate risk to derive the following statements about their exposure to this risk and their earnings from term transformation The systematic factor for the exposure to interest rate risk ... banks’ interest rate risk (See Staikouras (2003) and Staikouras (2006) for a survey) The first one is about the determinants of the banks’ exposure to interest rate risk, and the second one deals with ... W B (2002) Interest rate risk in the bank net interest margins BIS Quarterly Review December 2002 Entrop, O., C Memmel, M Wilkens, and A Zeisler (2008) Analyzing the interest rate risk of banks...

Ngày tải lên: 16/02/2014, 06:20

... full exposure to interest rate risk First, it does not incorporate off-balance-sheet items, such as interest rate derivatives, which can be used to take on or hedge interest rate risk; for this ... their 21 interest rate risk profile Banks may choose so for the purpose of hedging interest rate risk in their loan portfolios or in order to take specific positions on future interest rate movements ... interacted with each interest rate surprise are jointly equal to zero 23 Table 6: Effect of Interest Rate Surprise on Bank Stock Returns (By Usage of Interest Rate Derivatives) Interest Rate Surprise...

Ngày tải lên: 17/02/2014, 03:20

... part of the management of interest rate risk at certain banks The notional amount of interest rate contracts such as interest rate options, swaps, futures, and forward rate agreements—has grown ... Exposure to Interest Rate Risk value changes To measure interest rate risk, the model estimates fair values under prevailing interest rates (base case) and at alternatively higher and lower rate levels, ... of bank risk profiles CONCLUSION Interest rate risk does not currently appear to present a major risk to most commercial banks Nevertheless, for individual institutions, interest rate risk must...

Ngày tải lên: 06/03/2014, 02:21

... addition to national banks.* Interest Rate Risk Low Interest Rate Risk Moderate Interest Rate Risk High Responsible officials fully understand all aspects of interest rate risk Responsible officials ... Structures for Managing Interest Rate Risk Evaluation of Interest Rate Exposures Supervisory Review of Interest Rate Risk Management Risk Identification Risk Measurement Risk Monitoring Risk Control 1 ... use the expanded procedures contained in Interest Rate Risk for community institutions exhibiting high interest rate risk or moderate interest rate risk with increasing exposure Use these expanded...

Ngày tải lên: 06/03/2014, 14:20

... routinely use interest rate derivatives to hedge away interest rate risk In India, while RBI guidelines advise banks to use Forward Rate Agreements and Interest Rate Swaps to hedge interest rate risks, ... banks to buy long dated assets, without bearing interest rate risk Interest rate risk measurement in banking can be done by simulating a scenario of higher interest rates, and putting together the ... hence have relatively little experience with measuring and monitoring interest rate risk Our results suggest that in addition to credit risk, interest rate risk is also economically significant Our...

Ngày tải lên: 06/03/2014, 14:20

... those with higher interest rate risk exposure or holding of complex instruments with significant interest- rate option characteristics may require more elaborate and formal interest rate risk management ... interest rate risk exposures in the Interest Rate Sensitivity form END BANK SUPERVISION DEPARTMENT Page of 10 Interest Rate Risk The Central Bank of the Bahamas APPENDIX Sources of Interest Rate ... the licensee’s interest rate risk; establish and maintain effective internal controls over the interest rate risk management process; monitor the licensee’s overall interest rate risk profile and...

Ngày tải lên: 15/03/2014, 01:20

... typically able to incorporate a wider range of interest rate risk sources and can therefore provide a better measure of interest rate risk exposure One such source of interest rate risk is ‘embedded ... managing interest rate risk, and (ii) assess the extent of interest rate risk being run by an ADI The principles set out the essential features of a sound framework for managing interest rate risk, ... approaches to interest rate risk measurement These approaches express an ADI’s interest rate risk exposure in terms of the potential change in the ADI’s economic value given a change in interest rates...

Ngày tải lên: 15/03/2014, 01:20

... in interest rates (Sinkey 2002) Interest rate swaps can thus reduce interest rate risk either by converting a fixed -rate income stream to a variable -rate stream or by converting a variable -rate ... an unexpected increase in interest rate risk, if rates rise, it loses money in the cash market By buying interest rate futures or forwards or by engaging in an interest rate swap in which the LRBA ... make interest rate risk management more effective Using derivatives can thus be considered as a part of any bank’s interest rate risk management strategy and also its total risk management strategy...

Ngày tải lên: 15/03/2014, 01:20

... Interest Rate Risk The potential impact of movements in interest rates on the institution Interest Rate Risk Position The amount of the institution’s exposure to interest rate risk Interest Rate ... assume interest rate risk; and explicit and prudent limits on the institution’s rate risk exposure i) Interest Rate Risk Philosophy The capacity of each institution to assume rate risk will vary with ... assets Measurement of Interest Rate Risk Managing interest rate risk requires a clear understanding of the amount at risk and the impact of changes in interest rates on this risk position To make...

Ngày tải lên: 15/03/2014, 02:20

... is interest rate risk?  Sources of interest rate risk 3 Impact of adverse movements in interest rates on organisations 4 Methods to measure interest rate risk Methods to manage interest rate ... interest rates to fall • Outright interest rate risk – the impact of a change in the overall level of interest rate risk For example, if an investor holds a fixed interest bond and interest rates ... discount rate (interest rate) on the value of financial instruments, hedges and the return on projects Sources of interest rate risk Interest rate risk can arise from a number of sources: • where interest...

Ngày tải lên: 15/03/2014, 02:20

... of fixed -rate commercial loans are consistent with recent evidence on “debt market timing.” Key words: fixed -rate loan, adjustable -rate loan, corporate risk management, interest rate risk Vickery: ... rising interest rates However, exposure to interest rate risk also likely varies a great deal across firms For example, in industries where output or cashflows covary positively with interest rates, ... effect of ‘fixed rate versus adjustable rate outcomes on the exposure of small firms to interest rate risk The point of comparison is the magnitude of interest rate derivatives hedging by large...

Ngày tải lên: 15/03/2014, 10:20

... the interest rate Interest rate (7) For higher interest rate changes, the concept of convexity can be used This is based on the second derivative of the asset value function to the interest rate, ... a variable rate However, interest rate risk assessment remains an important topic, specially if fixed rate credit contracts gain extra importance as a response to recent interest rate hikes REFERENCES ... typologies of interest rate risk This gives us more accuracy when isolating the source of this risk on the balance sheet structure of the institution The types of interest rate risk most frequently...

Ngày tải lên: 22/03/2014, 17:20

... Market, Interest and Exchange Rate Risks”, Journal of Banking and Finance, 16, 9831004 Choi, J., Elyasiani, E and Saunders, A (1996) “Derivative Exposure and the Interest Rate and Exchange Rate Risks ... sector have concluded that interest rate sensitivity has decreased in the late 1980's and early 1990's due to the availability of interest rate derivatives contracts for hedging purposes (Choi et ... in the long-term interest rate? • Then, if indeed the sensitivity is significant, is there a negative relationship between stock returns and interest rate changes? • Is interest rate sensitivity...

Ngày tải lên: 22/03/2014, 17:20

... established for the bank’s interest- rate risk profile To determine if the bank’s interest- rate risk profile is within those limits To evaluate the management of the bank’s interest- rate risk, including the ... the profile is consistent with stated interest- rate risk objectives and strategies Determine whether changes in the net interest margin are consistent with the interestrate risk profile developed ... transactions, including credit risk, concentration risk, interest- rate risk (including prepayment risk) , operational risk, liquidity risk, moral-recourse risk, and funding risk However, since the securitization...

Ngày tải lên: 29/03/2014, 13:20

... negative) of the interest rate betas The sign of the interest rate beta provides an indication of the direction of a BHC’s interest rate risk exposure In measuring the extent of interest rate risk, however, ... term designed to capture interest rate changes The coefficient on the interest rate term (the interest rate “beta”) can be interpreted as a measure of interest rate risk exposure Most of these ... and banks’ interest rate risk exposure The market-model approach to interest rate risk measurement provides a way to assess the relationship between derivatives and interest rate risk exposure...

Ngày tải lên: 29/03/2014, 13:20

... Flow Risk- free rate +15bps Risk- free rate minus variable negative spread34 Risk- free rate Risk- free rate minus variable negative spread35 Risk- free rate Risk- free rate +15bps Risk- free rate +15bps ... Flow Risk- free rate +15bps Coupon from net interest income model +50bps Coupon from net interest income model +50bps Risk- free rate Coupon from net interest income model +50bps Risk- free rate ... marked-to-market and interest rate risk arises due to volatility in the bank’s net interest income In contrast to standard models, however, we integrate credit and interest rate risk using the framework...

Ngày tải lên: 29/03/2014, 13:20

... THEORY OF INTEREST RATE RISK AND INTEREST RATE RISK MEASUREMENT 2.1 Background 2.2 Risks assumed by banks 2.2.1 Credit risk 2.2.2 Interest rate risk 2.2.3 Operational risk 2.2.4 Liquidity risk 2.2.5 ... Price risk vi 2.2.6 Compliance risk 2.2.7 Foreign Exchange risk 2.2.8 Strategic risk 10 2.2.9 Reputation risk 10 2.3 Interest rate risk 10 2.4 The model of measuring the interest rate risk 12 ... rise interest rate will decrease the value of the Table 1: Exposure to interest rate Rate Changes of rate Lender Borrower Existing exposure Floating rate + - Rate - + Rate - + Rate Fixed Rate Rate...

Ngày tải lên: 26/05/2015, 08:34