Year 1 Year 2

RSA 100 200

RSL 1,750 2,000
RSG -1,650 -1,800
Duration 0.5 1
Interest movement 2.00% 16.5 36.0

Equity 1,000
Limit 15% 150

Year 1 Year 2
RSA 700 200
RSL 1,500 2,000
RSG 1,200 -1,800
Duration 0.5 1
Interest movement 2.00% -12.0 36.0
OBS-IRS-Receive 2000
OBS-IRS-Pay
Equity 1,000
Limit 20% 200

16.67 16.67
- 16.67 - 16.67

20.00 25.00
- 20.00 - 25.00

Liquidity Bucket Inidividual Positive

Cummulative

Liquidity Gaps 100 25

100 125
 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9
300 400 1,000 1,100 1,500 1,500 1,750
2,000 1,750 1,750 1,750 1,500 500 100
-1,700 -1,350 -750 -650 0 1,000 1,650
1.5 2 2.5 3 3.5 4 4.5
51.0 54.0 37.5 39.0 0.0 -80.0 -148.5

Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9

300 400 1,000 1,100 1,500 1,500 1,750
2,000 1,750 1,750 1,750 1,750 500 100
-1,700 -1,350 -2,750 -650 -250 1,000 1,650
1.5 2 2.5 3 3.5 4 4.5
51.0 54.0 137.5 39.0 17.5 -80.0 -148.5

2000

16.67 16.67 16.67 16.67 16.67 16.67 16.67

- 16.67 - 16.67 - 16.67 - 16.67 - 16.67 - 16.67 - 16.67

30.00 50.00 50.00 50.00 50.00 50.00 50.00

- 30.00 - 50.00 - 50.00 - 50.00 - 50.00 - 50.00 - 50.00

Rs. 25 crore
Rs 100 Crore Rs. 150 Crore 150

Rs 100 Crore Rs 200 Crore 250

-50 -150
75 -75
 Cash Flow Timing
No behavioural study Certain Certain Fixed rate loans without any prepayment option
Behavioural Study Certain Uncertain NMD, CASA TDs
Behavioural Study Uncertain Certain Floating rate loans without any prepayment opt
Behavioural Study Uncertain Uncertain Interest Rate Options, Loans with embedded o
 Year 10 Year 11 Year 12 Total
1,750 2,500 2,500 14,600
100 200 200 13,600
1,650 2,300 2,300 1,000
5 5.5 6
-165.0 -253.0 -276.0 -688.5

Year 10 Year 11 Year 12 Total

1,750 2,000 2,400 14,600
100 200 200 13,600
1,650 1,800 2,200 1,000
5 5.5 6
-165.0 -198.0 -264.0 -532.5 Total duration Gap < +/-200

16.67 16.67 16.67 200.00

- 16.67 - 16.67 - 16.67 - 200.00

250.00 250.00 250.00 1,125.00

- 250.00 - 250.00 - 250.00 - 1,125.00
 without any prepayment option

ns without any prepayment option

ptions, Loans with embedded options
Calculating EVE or Market Value of Equity at Risk

Economic value of equity (EVE) at risk or fall in market value of equity (MVE) depicts a change in the market value of e
The respective change in assets and liabilities is computed from the interest rate shock derived, based on the value at

Step 1: Determine look back period

Determine the look back period over which the risk is to be evaluated. For illustration purpose let us assume a look ba

Step 2: Data collection

The data is interest rate data for all avaialble buckets for the determined look back period.

Step 3: Calculate the return series

Calculate the returns series for all the interest rate buckets by taking the natural logarithm of the ratio of successive ra

11.25
13.17
-15.76%

Step 4: Calculate the days to maturity/days to reset

Calculate days to maturity and in case of floating rate instruments, days to next reset across the balance sheet items. E

Step 5: Calculate individual weights for each asset and liability

Calculate the weights of each individual asset and liability with respect to the total interest bearing asset and liability p
Step 6: Obtain return series for each individual asset/liability
Based on the days to maturity/days to reset calculated in step 4 obtain the relevant return series calculated in step 3 f
In our example for the individual asset "Term Finance Certificates" which had 328 days to maturity, this is the return s

Step 7: Calculate wieghted average return series for assets and liabilities separately
Using the weights determined in Step 5 and the return series obtained above, weighted average return series for asse

Step 8: Compute VaR

Using the weighted average series compute the volatilities and holding VaR for both assets and liabilities. In our examp

Step 9: Compute the MTM weighted average YTM

Calculate the weight average YTM for assets and liabilities respectively. This is carried out in two stages as follows. No
Step 9a: First calculate the weighted average YTM for each asset/liability within each asset/liability category.
Step 9b: Next calculate the weighted average YTM of each category to the total interest sensitive asset/liability portfo
This is illustrated step-wise for the asset portfolio. Illustration of step 9a:
Illustration of step 9b:

Step 10: Compute Rate Shock

The rate shock will be calculated using the following formulas:
Rate shock assets = MTM weighted YTM for assets X holding VaR for assets
Rate shock liabilities = MTM weighted YTM liabilities X holding VaR for liabilities
This is illustrated iin our example as follows:

Step 11: Compute the weighted duration of assets and liabilities

Calculate the weighted average duration for assets and liabilities respectively. As for the case of YTM this is carried ou
Step 11a: First calculate the weighted average duration for each asset/liability within each asset/liability category.
Step 11b: Next calculate the weighted average duration of each category to the total (interest sensitive) asset/liability
This is illustrated step-wise for the asset portfolio.
Illustration of step 11a:
Illsutration of step 11b:

Step 12: Fall in EVE/MVE

The fall in MVE is calculated as the fall in assets' MTM value less the fall in liabilities' MTM value

- Fall in assets MTM value = Weighted duration of assets X rate shock assets X MTM total assets
- Fall in liabilities MTM value = Weighted duration of liabilities X Rate shock liabilities X MTM total liabilities
Our example illustrates this as follows for the 90% confidence level:

The complete range of values for confidence levels 86% to 99% is given in the table below as well as depicted in the fo
nge in the market value of equity due to changes in market value of assets and liabilities.
ived, based on the value at risk (VaR) approach.

ose let us assume a look back period from 1st Jan 2009 to 30 June 2009, inclusive.

of the ratio of successive rates.

ss the balance sheet items. Every date is counted with reference to 30 June 2009.

bearing asset and liability portfolio (based on their MTM).

 series calculated in step 3 for each individual asset and liability.
maturity, this is the return series for interest rate bucket 271 - 365 days.

erage return series for assets and liabilities are derived. In our example, this is illustrated as follows:

and liabilities. In our example the volatilities and 10-day holding VaR at the 90% confidence interal for the asset and liabilities are as fo

n two stages as follows. Note that the YTMs for individual instruments are based on market rates:
/liability category.
nsitive asset/liability portfolios.
se of YTM this is carried out in two stages as follows:
asset/liability category.
est sensitive) asset/liability portfolios.
M total liabilities

as well as depicted in the following two graphs:

the asset and liabilities are as follows:
 Bonds B1 B2 B3
Coupon 8.50% 9.25% 12.00%
Frequency Yearly Yearly Yearly <-- Do the same exercise using half-ye
YTM 8.50% 9.25% 12.00% <-- This implies that the bonds are
Term (yrs) 7 8 11
Duration <-- Compute at the current YTM le
ModDuration <-- Compute at the current YTM le
DV01 <-- Compute at the current YTM le
Price (+1%) <-- Compute the price using durati
Price (-1%) <-- Compute the price using durati
Price (+1%) <-- Compute the price using full re
Price (-1%) <-- Compute the price using full re
Convexity
Convexity adjusted price
 same exercise using half-yearly and quarterly coupon payment frequency
mplies that the bonds are either trading at par/issued at par

ute at the current YTM levels

ute at the current YTM levels
ute at the current YTM levels
ute the price using duration based approach
ute the price using duration based approach
ute the price using full revluation
ute the price using full revluation