Asset/Liability Management – Introduction

Asset/Liability Management  – Introduction


In this module, we analyze the impact of interest
rate shifts on a financial institution’s net interest income and net worth. In contrast
to the value-at-risk techniques that focus on the institution’s trading portfolio,
we concentrate here on the so-called accrual or banking book, in which the institution
books primarily positions that it intends to hold to maturity. We examine in successive
chapters alternative techniques based on the so-called repricing model and the duration
model, and conclude by describing the guidelines of the Basle Committee for the measurement
and management of this risk. This two-part module contains four chapters:
In Part 1, Chapter 1 reviews general notions of interest rate risk in the banking book,
before describing the concept of repricing gaps and the use of a gap report to quantify
and manage this risk via the so-called repricing model.
Still in Part 1, Chapter 2 reviews general notions of duration and modified duration
before describing the duration model for the quantification and management of interest
rate risk. In Part 2, Chapter 3 describes the guidelines
of the Basle Committee for the measurement and management of this risk, and
Chapter 4 contains 6 quiz questions to test your understanding of these materials.

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