1) Earnings sensitivity analysis involves: 2) If a bank has a negative duration

Question

1) Earnings sensitivity analysis involves:

2) If a bank has a negative duration gap, the value of its equity is expected to:

3) Economic value of equity sensitivity analysis:

4) Derivatives used by banks to manage interest rate risk include:

A) always using parallel yield curve movements B) allowing asset yields and liability costs to change by different amounts C) ignoring the impact of embedded options to make the analysis more clear D) ignoring the time at which rates on assets and liabilities change E) all of the above F) none of the above

Explanation / Answer

1. Earnings sensitivity analysis involves:

Answer :Always using parallel yield curve movements (becuase we assume that all of the short term, medium term and long term fixed income maturities chnage by the same basis points)

2.  If a bank has a negative duration gap, the value of its equity is expected to:

Answer: Increase if interest rates go up (becuase the bank's market value of equity goes up becuase market value of libailities decreases by more than the value of the market value of asset decrease. To balance this, the equity value has to increase)

3.Economic value of equity sensitivity analysis:

Answer: Measures the change in equity value when interest rates change (self explantory)

4. Derivatives used by banks to manage interest rate risk include:

Answer: All of the above

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