Part Two: Measuring the impact of interest rate changes on bank balance sheet Given below is the balance sheet of a hypothetical bank. Using the balance sheet and other information provided, analyse the impact of interest rate risk this bank exposed to if the market interest rate increases by (R)xxx bps. 1. The coupon rate paid on 5-year T-bonds is 5.00% (per annum). The coupon payment is received semi-annually. 2. The coupon rate paid on 10-year T-bonds is 5.50% (per annum) and the coupon payment is received annually. 3. Variable rate mortgages are repriced at every six months. 4. 1-year CDs have been issued with a coupon rate of 3.00% (per annum, semiannual payments) 5. 5 year CDs has been issued with a coupon rate of 4.50% (per annum, annual payments). 6. The current price on IRFs is $98.00 per $100FV with a contract size of $1,000,000. The duration of the deliverable security is xx yrs. Assume that the sensitivity of the futures and spot rates (b ratio) is equal to xx. 7. x denotes missing data that will be provided in tute classes. In your written analysis, you are required to complete the following tasks: (i) Considering that the interest rate will increase, analyse the extent to which this bank is exposed to interest rate risk/s, if any. In this case, using your understanding about the interest rate risk as discussed during the semester, you are required to measure interest rate risk using major models introduced in this unit. Hint: you may analyse the impact of rate change on net worth and net interest income over 30 days and one year horizons: (ii) Following the analysis in part II above, formulate a strategy to cover any decline in net worth using futures, if applicable and; (iii) Provide a brief assessment as to whether the bank is facing any other risks in its current operations and if so, outline a strategy with recommendations to address/manage such risks. In this strategy you may include recommendations that can be implemented in the medium to long run in managing the risk as well as improving the bank's profitability. Part Two: Measuring the impact of interest rate changes on bank balance sheet Given below is the balance sheet of a hypothetical bank. Using the balance sheet and other information provided, analyse the impact of interest rate risk this bank exposed to if the market interest rate increases by (R)xxx bps. 1. The coupon rate paid on 5-year T-bonds is 5.00% (per annum). The coupon payment is received semi-annually. 2. The coupon rate paid on 10-year T-bonds is 5.50% (per annum) and the coupon payment is received annually. 3. Variable rate mortgages are repriced at every six months. 4. 1-year CDs have been issued with a coupon rate of 3.00% (per annum, semiannual payments) 5. 5 year CDs has been issued with a coupon rate of 4.50% (per annum, annual payments). 6. The current price on IRFs is $98.00 per $100FV with a contract size of $1,000,000. The duration of the deliverable security is xx yrs. Assume that the sensitivity of the futures and spot rates (b ratio) is equal to xx. 7. x denotes missing data that will be provided in tute classes. In your written analysis, you are required to complete the following tasks: (i) Considering that the interest rate will increase, analyse the extent to which this bank is exposed to interest rate risk/s, if any. In this case, using your understanding about the interest rate risk as discussed during the semester, you are required to measure interest rate risk using major models introduced in this unit. Hint: you may analyse the impact of rate change on net worth and net interest income over 30 days and one year horizons: (ii) Following the analysis in part II above, formulate a strategy to cover any decline in net worth using futures, if applicable and; (iii) Provide a brief assessment as to whether the bank is facing any other risks in its current operations and if so, outline a strategy with recommendations to address/manage such risks. In this strategy you may include recommendations that can be implemented in the medium to long run in managing the risk as well as improving the bank's profitability
