Yanuar Dananjaya, Bsc.

, MM

Measuring Interest Rate Risk

IRR Measurement
Reprising Model
Maturity Model
Duration Analysis
Reprising Model
1.Choose a period of interest 1 month, 3 months, 1 year, 3 years,
etc

2.Calculate Rate Sensitive Asset and Rate Sensitive Liability during

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the period of interest

3.Calculate Gap between RSA and RSL (RSA RSL)

4.Gap indicate the level of risk. The higher the gap, the higher the
risk. Zero gap meaning zero risk

5.NII = Gap X i
6.If check all RSA and RSL, get Cumulative Gap CGAP

Yanuar Dananjaya, Bsc., MM

Measuring Interest Rate Risk

Reprising Model (cont)
7.i can be different between RSA and RSL (spread effect)
NII = RSA x i(RSA) RSL X i(RSL)

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Weakness of Reprising Model

1.Ignore RSA RSL maturity difference within period
2.Ignore time value of money

Yanuar Dananjaya, Bsc., MM

Measuring Interest Rate Risk

Maturity Model
Unlike the repricing model, pays attention to Time Value of Money
Unlike the repricing model, RSA and RSL are assets and liabilities
with FIX rate

Example
A bank receive 1 years deposit of $1,000 with interest is fix10% per
year, interest paid every end of year. CB Interest rate suddenly
increase by 1%. What is the value of the deposit?

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A bank receive 1 years deposit of $1,000 with interest

is
floating10% per year, interest paid every end of year. CB Interest rate
suddenly increase by 1%. What is the value of the deposit?

Yanuar Dananjaya, Bsc., MM

Measuring Interest Rate Risk

Example (cont)
A bank gives 1 years loan of $1,000 with interest

is fix10% per year,

interest paid every end of year. CB Interest rate suddenly increase by
1%. What is the value of the loan?

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Repeat at 3 years period

Repeat for CB IR suddenly fall by 1%
Observation
A rise in CB IR leads to fall in the value of asset and liability
A fall in CB IR leads to rise in the value of asset and liability
The longer the maturity, the bigger rise/fall in asset and liability
Profit/loss depends on the change of E. A L = E
Profit or loss due to rise or fall in CB IR depends on asset size,
asset maturity, liability size, and liability maturity

Yanuar Dananjaya, Bsc., MM

Measuring Interest Rate Risk

Calculation of many assets and many liabilities
Use weighted average maturity of asset and liabilities
Use total assets and total liabilities
Example

A bank has loan and deposit as follow. Deposit rate is 8%, loan rate

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is 10%. Suddenly CB IR drop 1%. Calculate loss/profit of the bank.

What happen if CB IR rise 1%?