3.3marketriskmgmt

- analyse -> approach -> hedge -> report

- emphasis is placed on interest rate risks

- ALM=optimization of an institutions financial resources (balance sheet management)

- highly important for banks as b/s are predominantly financial+highly leveraged

- banks have more sophisticated ALM methodologies. but it is relevant for all institutions

income driven (Jahresgewinn um 1% erhöht)

Bilanzsumme stieg 9%

EK + 5.5%

margins sinken -> volumes rauf, growth against margin decrease

- Risks appear opposite

- assets values grow when rates decline, while income suffers

- Solution: Net effect = total return

- Evidence: real estate boom due to low rates

- asset repricing slower than liabilities

Curve risk (curves change)

Basis risk (differentials move)

Repricing risk (roll-over risk)

Option risk (open or embedded)

Model risk (false theories)

- Effect on one single bond (MTM) are opposed

- Balance sheets are a combination of long bond and short bond

- A > L: Temporary positive as long as rates fall. However, in the long

run, low interest rates are bad, as it presses margins and returns on

invested equity

- A < L: Good as soon as rates rise. However, costly if rates curve is

positively sloped

- Be aware of accounting. Internal and external reporting may vary!

- Where is your bonus based on? What do analysts monitor?

- Academics love value effects, but practice is largely accrual

- risk is not yet regulated -> free risk!

asdf

a