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Asset and Liability Management: The Banker’s Guide to Value Creation and Risk Control, Second Edition by Youssef F. Bissada, Jean Dermine

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Solution to Stage Nineteen

1:
Step 1. Variance of total income=total risk2 = standard deviation of total income2 = σ2
 =(£ gap2 × £ rate volatility2)
  + ($ gap2 × $ rate volatility2)
  + (2 × £ gap × $ gap × correlation£,$ × £ rate volatility × $ rate volatility)
 =(200,0002 × 0.00122)
  + (150,0002 × 0.00182)
  + (2 × 200,000 × 150,000 × 0.7 × 0.0012 × 0.0018)
 =221,220
Step 2. Calculate the volatility (standard deviation) of total income.
Volatility of total income= 1 standard deviation of total income = σ
 = squared root of variance = √221,220
 = £470.34

 

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