bank , asset duration 3 ,liability duration 5 , market value of asset 100 billion , market value of liability 90billion . what is its overall interest rate exposure its market value of net worth will increase or decrease if unexpected interest rate rise
LADG = 3 - 90/100 * 5 = -1.5 so if rates increase - exposure will be -1.5% for each 1% change rates fall - it will be +1.5% for each 1% change
3 - (90/100 * 5) = -1.5 Effective rate is -1.5% to surplus or as a percentage 15% loss in equity.
in my understanding net worth will increase if interest rates increase since duratiion liab > duration assets…
Chris0027 Wrote: ------------------------------------------------------- > in my understanding net worth will increase if > interest rates increase since duratiion liab > > duration assets… That is correct. Bank has a negative exposure to rising rates hence the negative duration.