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managing interest rate risk on balancesheet of balance

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Information about managing interest rate risk on balancesheet of balance
Finance

Published on February 6, 2009

Author: tozo

Source: slideshare.net

Description

banks, interest rate risk
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Managing Interest Rate Risk on the Balance sheet of Bank and FIs By: S.K Dutta Senior General Manager Treasury Management Aug,08

Objective To learn how banks & financial institutions balance interest rate risk. To know more about Overnight Index Swap, a derivative instrument used for managing interest rate risk.

To learn how banks & financial institutions balance interest rate risk.

To know more about Overnight Index Swap, a derivative instrument used for managing interest rate risk.

Business Of Banks and Financial Institutions

What all risks are involved in lending for Long Term ? Interest rate risk Interest rate may go up during the tenure of lending Interest margin Interest earning minus interest expense will reduce

Interest rate risk Interest rate may go up during the tenure of lending

Interest margin Interest earning minus interest expense will reduce

Solution- Protect IRR Several derivative instruments are available in Financial markets.

Several derivative instruments are available in Financial markets.

Interest Rate Swap(IRS)

Overnight Index swap(OIS) OIS is an Indian National Rupee Interest Rate Swap OIS is a form of Bilaterally Traded One party agrees to pay the other party a fixed interest rate in exchange for receiving the average call rate Fixed to Floating rate swaps Advantages over Treasury Bills OR Commercial Paper Lack of Credit risk No exchange of principal Short Maturities & Flexible in tenor

OIS is an Indian National Rupee Interest Rate Swap

OIS is a form of Bilaterally Traded One party agrees to pay the other party a fixed interest rate in exchange for receiving the average call rate

Fixed to Floating rate swaps

Advantages over Treasury Bills OR Commercial Paper

Lack of Credit risk No exchange of principal

Short Maturities & Flexible in tenor

Mechanics Of OIS

Hedging & Managing Interest Rate Risk

Valuation of OIS

Example of OIS A 2 yr Rs10 cr swap pays positive value at 7% per annum if rates rise to 8%. How much has the swap declined in value ? The swap receiver has a loss of 1% per annum on Rs10 cr, which is Rs100,000 cash per annum. This is PV at prevailing swap rate Rs 100,000/1.09 + Rs100,000/(1.09) 2 = Rs 175911= 1.76%

A 2 yr Rs10 cr swap pays positive value at 7% per annum if rates rise to 8%.

How much has the swap declined in value ?

The swap receiver has a loss of 1% per annum on Rs10 cr, which is Rs100,000 cash per annum. This is PV at prevailing swap rate Rs 100,000/1.09 + Rs100,000/(1.09) 2 = Rs 175911= 1.76%

Arbitrage opportunity on OIS Arbitrage profit can be earned by structuring an OIS along with G-Sec bond because of: Yield Difference Transfer of Principal amount Credit risk Arbitrage G-Sec (3 yrs) OIS (3 yrs) Rec. fixed coupon (7.67%) Pay CBLO (floating) Rec. floating(MIBOR) Pay fixed (7.20%)

Arbitrage profit can be earned by structuring an OIS along with G-Sec bond because of:

Yield Difference

Transfer of Principal amount

Credit risk

Arbitrage

Conclusion

Thank you

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