In such a case management strategy is implemented duration

The bank is exposed interest rate risk, but also has the potential to obtain higher incomes. The method of control interest rate risk on the basis of duration is also characterized by fundamental flaws. In this method, all assets and liabilities do not differ, but are seen only for a period of obtaining the return of the original value (duration). However, the various types of assets and liabilities of the bank even with the same duration as distinguished from the average value of the cost of raising revenue and for the period, and their variability over the same period, and therefore, and possible interest rate risk. Since the cost of bank's equity capital equal to the difference of assets and liabilities, which are more correctly defined as the present value of the current period in the previous structure of assets and liabilities of the bank, all the components of which have their average yield, the cost of raising and risk indicators (the variance of return and the cost of raising), then quite fair to speak about the expected cost of equity and the risk of its decline. Thus, the method of controlling interest rate risk on the basis of duration does not give recommendations to optimize the structure of assets and liabilities on the criterion of maintaining the value of equity at the lowest possible risk to the reduction or by the criterion of maximizing it, given the specified risk reduction. In addition to this, this method has the following disadvantages: the difficulty of accurately calculating the duration of the need to take account of more subjective conditions, the need to predict the timing of changes in base rates and their level during the forthcoming movement of funds, the need for constant monitoring and correction of the duration of assets and liabilities, which varies with changes in interest rates and even with all conditions remaining unchanged with time. Category: Management Operations Commercial Bank