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Session no.

Introduction to Market risk
& Interest rate risk

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Revisit Risk Type

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Market risk
Losses in on and off balance sheet
items arising from movement in
market prices
Main market risks are
Commodity price risks
Interest rate risks
Exchange rate risks
Liquidity risks
Equity price risks

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Interest rate risk- defined

Potential impact on Net Interest Income (NII) or

Net Interest Margin (NIM) or Market value of
Equity (MVE) by unexpected changed in interest

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Interest rate risk management

.and bank profitability

and anticipating the behavior of

interest rates

.and measure and management of risk

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Bank profitability

Impact on Net interest income (spread)

Impact on Net interest margin (NIM)

Impact on Market Value of Equity of

bank (MVE)

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.behavior of interest rates
Earning perspective meaning that impact of
changes of interest rates on net interest
Economics value perspective that look at
long term economic viability of the bank i.e.
sensitivity of bank net worth to the changes in
interest rates.
Assessing extent of banks interest rate risk is by
any perspective is not a simple exercise as each
asset has different risk and return characteristics,
pricing, periods etc.

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.and Measuring and
managing the risk

Traditional gap method

Duration gap method

Interest rate derivatives

Liquidity management
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Type of Interest rate risks

Main interest rate risks are:

Mismatch or Gap risk or re-pricing risk
Basis risk
Embedded option risk
Reinvestment risk
Non-paying liabilities like current
deposits, remittance floats etc.,

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Interest rate system in India
Liability side (deposits)
Interest deregulation by RBI
Major banks still paying 4% in savings bank
and paid quarterly on daily balance basis
Term deposit rates varies as per interest
rate view of individual banks and paid
Floating interest fixed deposit rate
Attempted by many banks linked to MIBOR
or other bench mark rates but not
successful - Market not yet developed

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Interest rate system in India

Assets side ( Loan and advances)

Fixed and floating rates
Floating rate loans are linked to base
rate, MIBOR , LIBOR etc.
Spread is decided as per credit rating
Fixed rate loan carries reset clause

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Thank You

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