Financial Risk Manager Part 2

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Explanation:

The duration of the bank's assets and liabilities is:

D_{\text{Assets}} = \frac{(75 \times 0 + 130 \times 1 + 160 \times 4 + 240 \times 2)}{605} = \frac{2,250}{605} = 2.066

D_{\text{Liabilities}} = \frac{(300 \times 0.5 + 270 \times 3)}{570} = \frac{960}{570} = 1.6842

The effect of a 3% increase in interest rates can be calculated as:

\frac{-(2.066 \times 0.03 \times 605 - (1.6842 \times 0.03 \times 570))}{1.03} \approx -8.44

This implies that an increase of 3% in interest rates will result in a decrease of USD 8.44 million in the bank's net worth.

Explanation:

The duration of the bank's assets and liabilities is:

D_{\text{Assets}} = \frac{(75 \times 0 + 130 \times 1 + 160 \times 4 + 240 \times 2)}{605} = \frac{2,250}{605} = 2.066

D_{\text{Liabilities}} = \frac{(300 \times 0.5 + 270 \times 3)}{570} = \frac{960}{570} = 1.6842

The effect of a 3% increase in interest rates can be calculated as:

\frac{-(2.066 \times 0.03 \times 605 - (1.6842 \times 0.03 \times 570))}{1.03} \approx -8.44

This implies that an increase of 3% in interest rates will result in a decrease of USD 8.44 million in the bank's net worth.

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Assets	Amount (USD million)	Duration (years)
Cash	75	0
Federal funds loans	130	1.0
Governments securities and mortgages	160	4.0
Loans and leases	240	2.0
Total assets	605
Liabilities
Interest-bearing marketable deposits	300	0.5
Other borrowings	270	3.0
Total liabilities	570
Shareholder’s Equity	35
Total liabilities & Shareholder’s equity	605

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Last updated: July 5, 2026 at 07:08

An increase of 3% in interest rates will result in a decrease of USD 16.32 million in the bank's net worth.

An increase of 3% in interest rates will result in an increase of USD 16.32 million in the bank's net worth.

An increase of 3% in interest rates will result in an increase of USD 56.49 million in the bank's net worth.

An increase of 3% in interest rates will result in a decrease of USD 8.44 million in the bank's net worth.