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Chapter 16 Mini-Case Calculating and Comparing Gap, Duration, and Risk Management Alternatives Your employer has asked you to examine the interest-rate risk of your bank relative to your direct competition. Currently the interest rate is 6% but management is concerned that interest rates will fall by the end of the year and wants to see what would happen to the relative profitability of the firm if the decline actually occurs. Interest-rate risk depends on each bank's relative position of interest-sensitive assets and liabilities. You begin the analysis by collecting the information and estimates. Bank Balance Sheet Your Firm Competition Amount (Smillions) Duration (years) Amount (Smillions) Duration (years) 0.0 0.0 0.6 1.6 5.0 0.3 1.2 4.0 Assets Reserves and cash items Securities Less than 1 year 1-2 years Greater than 2 years Residential mortgages Variablerate Fixed-rate (30 years) Commerical loans Less than 1 year 1-2 years Greater than 2 years Physical capital 0.4 5.5 0.9 4.4 0.9 1.8 6.0 0.0 ANAR 0.6 1.4 0.0 5.4 |sos Run vwa 1.0 0.6 1.0 1.0 0.5 1.0 16 12 Liabilities Checkable deposits Money market deposit accounts Savings deposits CDs Variable-rate Less than 1 year 1-2 years Greater than 2 years Fed funds Borrowings Less than 1 year 1-2 years Greater than 2 years 0.4 0.3 0.6 14 1.1 10 2.9 0.0 10 14 18 0.7 0.4 1.2 2.9 12 31 1.8 3.8