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Asset&Liability Management

Asset&Liability Management. The Concept of Duration and Managing A Bank’s Duration Gap. 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. 7-4. Price Sensitivity of a Security. 7-5.

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Asset&Liability Management

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

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

  3. 7-3 To Calculate Duration

  4. 7-4 Price Sensitivity of a Security

  5. 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

  6. 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. 7-7 Duration Gap

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

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

  10. 7-10 Limitations ofDuration 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

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