Overview

This eCourse consists of three modules on interest rate risks. Module 1 introduces the concept of interest rate risk and how banks manage it. Note that the focus of the module is primarily on interest rate risk in the banking book – interest rate risk for the trading book falls within the scope of market risk.

Module 2 looks at the various measures of interest rate risk that banks used and the issues and challenges they face.

Module 3 looks at the various approaches that banks take to interest rate risk management.

Objective

On completion of this course, you will be able to:
- Define interest rate risk and identify the different types of reference rate used by banks
- Identify the potential impact of interest rate risk on a bank and the need to manage this risk
- Recognize how banks approach the management of interest rate risk and the expectations of regulators in relation to this
- Recall the importance of risk management frameworks (RMFs) in managing interest rate risk
Identify the key considerations and challenges when measuring interest rate risk
- Distinguish between the use of earnings-based measures, such as gap analysis, and economic value measures, such as economic value of equity (EVE) and economic value at risk (EVaR), to assess interest rate risk
- Recognize the role of funds transfer pricing (FTP) in the management of interest rate risk
- Identify the importance of limit setting and monitoring in ensuring that interest rate risk remains within appetite
- Recognize how a matching strategy can be used to reduce interest rate risk and the difficulties in adopting such a strategy in practice
- Identify the different types of derivative that can be used to mitigate interest rate risk
- Recognize some of the difficulties associated with managing interest rate risk, especially in a low interest rate environment

Content

Module 1: Interest Rate Risk - An Introduction
Topic 1: Overview of Interest Rate Risk
Topic 2: Interest Rate Risk & ALM
Topic 3: Regulatory Requirements
Topic 4: Managing CCR

Module 2: Interest Rate Risk – Measurement
Topic 1: Overview of Interest Rate Risk Measurement
Topic 2: Earnings-Based Measures
Topic 3: Economic Value Measures

Module 3: Interest Rate Risk - Management
Topic 1: Funds Transfer Pricing (FTP)
Topic 2: Limit Setting
Topic 3: Matching & Mismatching Strategies
Topic 4: Hedging
Topic 5: IRR Management Considerations