The method of portfolio immunization

As the method of immunization provides a portfolio of financial instruments decreased sensitivity to the effects of interest rate risk, there is a need to measure such characteristics as sensitivity. Indicator that is most often used for this purpose, a weighted average maturity of the financial instrument - the duration. Practical implementation of methods of immunization will calculate duration of all cash receipts on assets and all payments on passive operations of the bank, get the depositors, creditors and shareholders of the bank. To determine the duration of the portfolio assets or liabilities of the bank calculates the duration of each financial instrument included in the portfolio, and found performance weigh on market value. The sum of all values ​​obtained is a weighted average maturity (duration) portfolio as a whole. M - number of financial instruments in the portfolio. Since the value of assets exceeds the value of liabilities by the amount of capital the bank, the ratio between the duration of assets and liabilities of the bank is described by the model: Ratio of liabilities to assets is less than 1, so from the above it follows that the duration of the portfolio assets must be shorter duration of the portfolio responsibilities. This means that regardless of the direction of changes in interest rates the bank's assets must be revalued faster than liabilities. Category: Management Operations Commercial Bank | Tags: immunization