Duration

$billion (years)

Assets

PrimeRate Loans (rates set daily) 400 1.0

1Year Discount Loans 360 1.0

30Year Mortgages 500 7.0

Total Assets 1260 ?

Liabilities and Equity

Super Now Checking Accounts (rates set daily) 500 1.0

6Month Certificates of Deposit 380 .5

3Year Certificates of Deposit 280 3.0

Total Liabilities 1160 ?

Equity (E) 100

For fixed income securities, DEAR can be stated as:

DEAR = (Dollar market value of position) (MD) (potential adverse move in yield)

where MD = D/(1+R), R is the rate of interest; and MD = Modified duration D = Macaulay duration.

For three-asset case (assets or portfolios a, b and c.

DEAR portfolio = [DEAR_aa² + DEAR_bb² + DEAR_cc² + 2_abab DEAR_aa DEAR_bb + 2_acac

DEAR_aa DEAR_cc + 2_bcbc DEAR_bb DEAR_cc]^1/2 , where _ab is the correlation coefficient between returns for assets a and b. To get VaR (Value at Risk) for the portfolio, multiply the DEAR portfolio by the square root of the number of days to be analyzed, say 30 days

1. compute the portfolio VaR for 30 days and the DEARs for the asset portfolio separately and for the banks entire asset portfolio for an interest rates increase of 200 basis points.