Calculating and Comparing Gap, Duration, and Risk Management Alternatives CONCEP

Question

Calculating and Comparing Gap, Duration, and Risk Management Alternatives CONCEPTS IN THIS CASE interesttate risH duration gap analysis ncome gap analysis minimizing risk ofmarket value interest-rate sensitive assets and liabilities Your employer has asked you to examine the interest-rate risk of your bank relative to your direct competition. Management is concerned that interest rates will fall by the end of the year and wants to see what would happen to the relative profitability of the firm if the decline actually occurs. Interest-rate isk depends on each bank's relative position of interest-sensitive assets and liabilities. You begin the analysis by collecting the information and estimates. Bank Balance Stert Reserves and cah tems Less than 1 year 1-2 yerrs Greater than 2years 0.6 1 6 0.3 12 4.0 Residentisl mortgages 0.4 0.9 Ficed-rate (30 years) 15 Commercial lons 0.9 0.6 1-2 yers Greater than 2 years Physical copitol 6.0 54 10 10 Checkable deposts Money market depost accounts Savings deposts 1.0 0.6 1.0 1.0 05 1.0 16 0.4 0.3 06 0.5 19 Less than 1 year 1-2 yers Greater then 2 yers 10 15 10 29 Fed fund 0.4 0.7 Less than 1-2 yer year Note: 1) current market interest rate is 10% 2) planning period is 1 year, 3) checking deposit pays no interest rates and 4) saving deposit's maturity is less than 1 year.

Explanation / Answer

Computation of Interest Sensitive Assets considering the planning period of 1 year

Particulars Firm (in million) Competitor (in million) Securities Less than 1 year 4 5 Residential Mortgages Variable Rate 9 21 Commercial Loans Less than 1 year 13 30 Total Interest Sensitive Assets 26 56

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