Risk Management (6) Flashcards
What is gap exposure?
The difference between the amounts of interest-sensitive assets and liabilities
How can an organisation’s gap exposure be identified?
By grouping together interest-sensitive assets and liabilities according to their maturity dates
What is negative gap?
Arises when the amount of liabilities maturing at a certain time exceeds the assets maturing at the same time
What is positive gap?
Arises when the amount of assets maturing at a certain time exceeds the amount of interest-sensitive liabilities maturing at the same time
What is the basis risk?
Even if a company has matched its assets and liabilities with a variable rate of interest, there may still be a risk if the variable interest rates are determined on different bases.
What is smooting the interest rate risk?
Involves maintaining an appropriate balance between fixed-rate and floating-rate borrowings or deposit
What is matching the interest rate risk?
This aims to have a common interest rate for both assets and liabilities
What is asset and liability management?
Matches the maturity of assets and liabilities
What does a forward rate agreement allow?
Companies to fix, in advance, either a future borrowing rate or a future deposit rate, based on a notional principal amount, over a given period
How are FRAs settled?
In advance at the start of the FRA term
How is an FRA cash settled?
Based on the present value of the difference on settlement date between:
The fixed contract rate
The reference interest rate
What is maximum maturity period of an FRA?
Usually about two years
Is premium paid for FRA?
No as no margin needs to be posted
What is interest rate futures?
Exchange-traded contracts whose value is determined by interest rates.
What is selling a future?
Creates an obligation to borrow money/obligation to pay interest
