Risk Measurement and Management: interest rate, liquidity and operational risk

Risk Measurement and Management: interest rate, liquidity and operational risk Essay example
Masters
Essay
Finance & Accounting
Pages 12 (3012 words)
Download 0
Name of student: Course title: Instructor’s name: Date due: Risk Measurement and Management 1. Interest rate risk This emerges when the value of an investment will change as a result of change in the absolute level of interest rates, in the range between two interest rates or like the yield curve relationship (Davidson, 2001)…

Introduction

It affects the value of bonds directly as compared to stocks thus a major risk to all bond holders. The increase in interest rate reduces the bond prices while their decrease inflates the bond prices. Therefore, as interest rate increase, the cost of holding a bond reduces because investor are able to recognize grater yields by opting to other investments that result into high interest rates(Allen, 2004). Interests’ rate risk may emerge as a result of basis risk, yield curve risk, repricing risks and optionality. Measurement These are instruments that help in detecting the level of interest rates to show how the risk can be managed effectively. These measurement tools involve repricing, maturity and duration models. The repricing model This model is also known as the funding gap model whereby a book worth accounting cash flow scrutiny of the repricing gap between the interests revenue gained on assets and the interest spent on liabilities over specific duration. Repricing gap is the variance amid the rate sensitive assets and liabilities (Ahmed, Beatty & Bettinghaus, 2004). Repricing model therefore, illustrates for example how a bank calculates the gaps in each basket by looking at the level of sensitivity of each asset and liability also known as time pricing. ...
Download paper
Not exactly what you need?

Related papers

Financial Innovation & Risk Management
Goldman Sachs is one of the banks using risk management strategies that either eliminates or mitigates some risks. In other instances, Goldman Sachs management decides to shift the risks to other parties (Goldman Sachs, 2012). The risk management strategies comprise of liquidity risk management, operations risk management, credit risk management and market risk management that has over the years,…
Financial Risk Management
At the business level, managers use VaR as a standard summery of market risk exposure. A benefit of the VaR which is a, the great value theory, is that it may be computed without full information of the return allocation. Semi or fully non-parametric estimation processes are obtainable for downside risk estimation. Additionally, at an adequately low confidence level the VaR calculate explicitly…
Market Risk and Credit Risk: Risk management strategy, policies & procedures
Commercial banks are the backbone of any economy and they contribute to the economic development in the following ways: 1) Promoting capital formation in the economy 2) Promotion of trade and industry through loans and investments 3) Development of agriculture through Agri-financing 4) Transferring surplus capital from developed to less developed regions to allow for balanced development of the…
Financial Risk Management
141). In this paper, Deutsche Bank, AG will be the organization that will be analyzed for its risk management and risk types it confronts. The types of risks that Deutsche Bank faces include: Credit risk: Credit risks come up from all dealings where concrete, conditional or possible claims in opposition to any counterparty, debtor or obligor. Deutsche Bank jointly refers to these parties as…
Operational Risk Management of xx company
But due to the worldwide credit crunch of 2007-08, the Lehman Brothers has resulted in a tremendous downfall. On September15, 2008, it filed for Chapter 11 bankruptcy, condemned to become the biggest bankruptcy filing in U.S. history and caused a downfall of the world’s financial system (Lounsbury and Hirsch, 2010, p.71). The federal government decided to not bail the company. The firm’s share…
Financial Risk Management
The banking and financial institutions of a country are responsible for the development and progress of different sectors in the economy. They mobilize household savings and lend it to the potential investors in a country. Investments made in the business corporations help them to expand and generate more employment opportunities in a country. Thus, financial institutions and banks play a pivotal…
Risk Management Report: Saint Charles Bank
However, the limitations of this method coupled with advances in management sciences have led to the development of alternate methods such as non-parametric DEA and parametric Stochastic Frontier Approach (Berger and Humphrey,1997) . Berger & Humphrey (1997) assert that the whole idea of measuring bank performance is to separate banks that are performing well from those which are doing poorly.…