Duration management

One way to manage interest rate risk management is a time interval, or duration. Analysis of the duration of the basis of this method of reducing the interest rate risk, as portfolio immunization. The contents of this method to reduce interest rate risk consists in the selection and inclusion in the portfolios of bank assets and liabilities of such financial instruments to minimize the sensitivity of the difference between assets and liabilities of the bank to change interest rates in the market, and thus protect the banking capital of the impact of interest rate risk . This means that the revaluation of assets and liabilities, which changes its value when interest rates change occurs in the prescribed manner. But according to the selected balance sheet structure can ensure that the revaluation the same effect on the value of both sides of the balance and had no negative impact on bank capital. Thus, the result of the revaluation of (currency) balance may increase or decrease, but subject to an immunization cost of capital the bank would remain stable. Thus, the purpose of immunization is to protect the bank from making any changes in market interest rates over a fixed period (planning horizon). The main task in the process of immunization bank balance is to select the combination of assets and liabilities, allowing the balance as a whole to become insensitive to changes in market rates. The individual balance sheet items are sensitive to changes in the parameters of the market, but the revaluation of assets and liabilities cancel each other. Picked up the composition and structure of balance sheet items so that the average maturity of the assets of roughly coincided with the average maturity of liabilities, the bank can protect themselves from the negative impact of interest rate risk: the average maturity of assets = average maturity of liabilities. Category: Management Operations Commercial Bank | Tags: duration