Interest Rate Risk Management

Agenda Program
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Prague, NH Hotel Prague
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Sources and Effects of Interest Rate Risk
The New Normal of Low Interest Rates
Measuring and Managing NII in the Banking Book
Duration GAP Analysis and Equity Risk Assessment
Customer Behaviour and Interest Rate Risk
Measuring Interest Rate Risk on Non-Maturing Products
Dynamic Replication of Non-Maturing Assets and Liabilities
Measuring VaR and Expected Shortfall in the Trading Book
Using Derivatives to Hedge Interest Rate Risk
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.

Program of the seminar: Interest Rate Risk Management

The seminar timetable follows Central European Time (CET).

09.00 - 09.15 Welcome and Introduction

09.15 - 12.00 Interest Rate Risk in Financial Institutions

  • Sources and Effects of Interest Rate Risk
  • Banking Book vs. Trading Book Risks
  • Profitability and Interest Rate Risk
    • Margins, leverage and ROE
    • Maturity transformation and spread risk
  • Managing IRR in a Low Interest Environment
  • Regulatory Requirements for Managing IRR

Measuring Interest Rate Risk in the Banking Book

  • GAP and Dynamic GAP Analysis
  • Simulation Method
    • Simulating NII using stochastic IR models
    • Simulating effect of product mix and pricing
  • Case Study and Exercises

12.00 - 13.00 Lunch

13.00 - 16.30 Measuring Interest Rate Risk in the Banking Book (2)

  • Duration Analysis
    • Duration explained
    • Duration GAP analysis
  • Measuring Equity Exposure to IRR
    • Non-interest bearing liabilities with a prudential role
    • Target duration of equity: explicit or assets driven
    • Modelling of equity based on implied economic value sensitivity
    • Stochastic simulation of equity exposure
  • Yield Curve Analysis
    • Projection of re-pricing rates
    • Key rate duration
  • Case Study and Exercises

09.00 - 09.15 Recap

09.15 - 12.00 Measuring Interest Risk of Non-Maturing Assets and Liabilities

  • Indentifying Stable and Volatile Components of Customer Balances
    • Balance, customer relationship, customer behaviour and operating environment
  • Assessing the Responsiveness Of Customer Rates to Market Rates
    • Direction, size and timing of rate changes
    • Legal and contractual issues
  • Deriving Interest Rate Exposure From NoMALs
  • Translating Exposures into Replicating Portfolios
  • Dynamic Replication of Non-Maturing Assets and Liabilities
  • Assessing the Impact of Structural Changes
  • Exercises

12.00 - 13.00 Lunch

13.00 - 16.30 Measuring Interest Rate Risk in the Trading Book

  • Pre-Payment Analysis
    • Using OAS analysis to evaluate interest rate risk of pre-payable mortgages
  • Value-at-Risk and Expected Shortfall Analysis
    • Calculating VaR and ES for interest sensitive assets and liabilities
    • Measuring spread and CVA risk
  • Using Principal Components Analysis
    • Estimating portfolio VaR
    • Estimating portfolio ES
  • Stochastic Simulation of IR in the Trading Book
  • Case Study and Exercises

09.00 - 09.15 Recap

09.15 - 12.00 Structural Interest Rate Risk Management

  • A/L Mix and Pricing
  • Balance Sheet Re-Engineering
  • Interest Rate Risk Portfolio Management
    • Matching
    • Classic and contingent immunization
    • Factor immunization
  • Case: Bank Immunization Strategies

Using Derivatives for Managing IRR

  • Overview of Derivative Instruments
  • Using FRAs/Futures to Manage Re-pricing Risk
  • Using Interest Rate Swaps to Hedge Fixed and Floating Rate Assets and Liabilities
  • Using "Macro Swaps" to Hedge Loan and Deposit Portfolios

12.00 - 13.00 Lunch

13.00 - 16.30 Using Derivatives for Managing IRR (continued)

  • Using Interest Rate Options to Cap Funding Costs
  • Using Swaps, Futures and Options to Hedge IRR in the Trading Book
  • Hedging Equity Exposure to IRR
  • Managing Pre-Payment Risk
  • Managing Multi-Dimensional IRR with Options
  • Using Structured Products to Transfer Risk
  • Accounting Issues in Using Derivatives
  • Case study
  • Exercises

Evaluation and Termination of the Seminar

Training catalogue in PDF
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