Managing Interest Rate Risk

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