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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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The control of interest rate risk

We have shown that there are two ways to look at interest rate risk.

  • The first one is very much driven by the impact of interest rate on the profit and loss account.

  • An alternative is to focus on the economic value of equity of the entire bank.

Since the last approach captures both short-term and long-term risks, it is recommended that both approaches are used.

Volatility of interest rate is a key variable. Two sets of scenarios should be foreseen:

  • volatility under ‘normal’ time; and

  • volatility at a time of crisis ...

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