Course · Act II: Hedge the Book · Act II case study
Bank interest rate risk: EVE and hedging
Case: measure a bank’s economic value of equity and duration gap, size a swap hedge, see extension risk stretch the bond book, and decide whether to drop the hedge on a forecast.
Key terms
- Economic value of equity (EVE)
- Assets minus liabilities, each valued at today’s rates. How a bank measures what rate moves do to its worth.
- Duration gap
- Asset duration minus liability duration scaled by liabilities ÷ assets. Positive: the bank loses value when rates rise.
- Hedge
- A position that gains when another loses, held to cut risk, not to bet on a forecast.
“The Committee” is part of the full course: 8 puzzles on bank interest rate risk: eve and hedging. Gullwing and Osprey are fictional banks; the Treasury yields and Fed rates are real. Try this act’s free chapter, “Who Sets the Short End”, first.
“The Committee” is in Act II: Hedge the Book. 8 puzzles, unlimited retries.
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