1 of 36
Definition
(1) Close FX position in the spot market, (2) Lend currency until
needed, (3) Borrow sold currency until same day. Difference
between interest earned and borrowing interest
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Lending and Borrowing Measuring IR risk
Changes in IR affects Measurement of Credit Risk
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2 of 36
Definition
,Reduce distress liklihood, volatility reduced, predictable CFs, hedge
against extraneous/ unrelated risks and make risk adverse
managers/firms more willing
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Benefits to Hedge Basis Risk
Default Risk Options
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3 of 36
Definition
(1) Historical: % change per day, sort highest to lowest; (2) Variance -
Covariance: never used in real life, assumes normal distribution,
cumbersome and (3) VaR Monte Carlo Simulation
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VaR Methods Duration Analysis
Measurement of Credit Risk Default Risk
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4 of 36
, Definition
Borrow LT and lend ST; decrease in IR = decrease in earnings and
increase in IR = increase in earnings
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Duration Gap Positive Gap
Negative Gap Negative Repricing Gap
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5 of 36
Definition
Examine sensitivity of market values of financials net worth to
change interest rates
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Ratio Analysis Gap Analysis
Efficiency Analysis Duration Analysis
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6 of 36
Definition
(1) Close FX position in the spot market, (2) Lend currency until
needed, (3) Borrow sold currency until same day. Difference
between interest earned and borrowing interest
Give this one a try later!
Lending and Borrowing Measuring IR risk
Changes in IR affects Measurement of Credit Risk
Don't know?
2 of 36
Definition
,Reduce distress liklihood, volatility reduced, predictable CFs, hedge
against extraneous/ unrelated risks and make risk adverse
managers/firms more willing
Give this one a try later!
Benefits to Hedge Basis Risk
Default Risk Options
Don't know?
3 of 36
Definition
(1) Historical: % change per day, sort highest to lowest; (2) Variance -
Covariance: never used in real life, assumes normal distribution,
cumbersome and (3) VaR Monte Carlo Simulation
Give this one a try later!
VaR Methods Duration Analysis
Measurement of Credit Risk Default Risk
Don't know?
4 of 36
, Definition
Borrow LT and lend ST; decrease in IR = decrease in earnings and
increase in IR = increase in earnings
Give this one a try later!
Duration Gap Positive Gap
Negative Gap Negative Repricing Gap
Don't know?
5 of 36
Definition
Examine sensitivity of market values of financials net worth to
change interest rates
Give this one a try later!
Ratio Analysis Gap Analysis
Efficiency Analysis Duration Analysis
Don't know?
6 of 36
