Asset&Liability Management

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Presentation transcript:

Asset&Liability Management The Concept of Duration and Managing A Bank’s Duration Gap

The Concept of Duration 7-2 The Concept of Duration Duration is the weighted average maturity of a promised stream of future cash flows.

7-3 To Calculate Duration

Price Sensitivity of a Security 7-4 Price Sensitivity of a Security

Duration of an Asset Portfolio 7-5 Duration of an Asset Portfolio Where: wi = the dollar amount of the ith asset divided by total assets Dai = the duration of the ith asset in the portfolio

Duration of a Liability Portfolio 7-6 Duration of a Liability Portfolio Where: wi = the dollar amount of the ith liability divided by total liabilities Dli = the duration of the ith liability in the portfolio

7-7 Duration Gap

Change in the Value of a Bank’s Net Worth 7-8 Change in the Value of a Bank’s Net Worth

Impact of Changing Interest Rates on Bank’s Net Worth 7-9 Impact of Changing Interest Rates on Bank’s Net Worth

Limitations of Duration Gap Management 7-10 Limitations of Duration Gap Management Finding Assets and Liabilities of the Same Duration Can be Difficult Some Assets and Liabilities May Have Patterns of CFs Not Well Defined Customer Prepayments May Distort the Expected Cash Flows in Duration Not a Linear Relationship Between Prices and Interest Rates