Description
Risk Management
This assignment provides practical experience in measuring and hedging interest rate risk.
You will utilize the Duration Gap Model and Economic Value of Equity (EVE) impact analysis to assess a
bank’s sensitivity to interest rate fluctuations.
#Given the simplified balance sheet below (values in millions USD), follow the steps to assess and
understand the bank’s interest rate risk exposure.
Simplified Balance Sheet (in millions USD)
Category
Item
Amount ($ M)
Duration (Years)
Assets
Cash & Reserves
100
0.0
Assets
Treasury Securities
300
2.0
Assets
Commercial Loans
400
4.0
Assets
Mortgage Loans
200
6.0
Assets
Total Assets (A)
1,000
–
Liabilities
Demand Deposits
250
0.25
Liabilities
Time Deposits
350
2.5
Liabilities
Long-Term Debt
300
5.0
Liabilities
Total Liabilities (L)
900
–
Equity
Shareholders’
Equity
100
–
Steps to Follow
Step 1: Compute Average Durations
– Calculate the weighted average asset duration (DA).
– Calculate the weighted average liability duration (DL).
Step 2: Compute the Duration Gap (DGAP)
Step 3: Estimate the Change in Economic Value of Equity (ΔEVE). Assume a +1% interest
rate shock.
Step 4: Interpretation
– Does the bank gain or lose value if interest rates rise by 1%?
– Which side of the balance sheet (assets or liabilities) drives this exposure?
Step 5: Hedging Strategy
– Propose one risk management technique (e.g., interest rate swap, futures contract, balance sheet
restructuring).
– Briefly explain how this strategy would reduce the bank’s interest rate risk.
Instructions
1. Excel File
– Asset and liability duration calculations.
– DGAP and ΔEVE results are clearly shown.
2. Written Report (2–3 pages)
– Introduction: Why interest rate risk matters for banks.
– Results: DGAP and ΔEVE (with interpretation).
– Recommendation: One hedging strategy and its impact.
College of Administrative and Financial Sciences
Assignment 1
Banks Management (FIN401)
Due date: (27/09/2025 @ 23:59 PM)
Course Name: Banks Management
Course Code: FIN401
Student’s Name:
semester: 1st
CRN:
Student’s ID Number:
Academic Year: 2025-26, 1st Semester
For Instructor’s Use only:
Instructor’s Name:
Students’ Grade: /5
Level of Marks: High/Middle/Low
Instructions – PLEASE READ THEM CAREFULLY
• This assignment is an individual assignment.
• The Assignment must be submitted only in WORD format via the allocated
folder on Blackboard.
• Assignments submitted through email will not be accepted.
• Students are advised to make their work clear and well-presented. This also
includes filling in your information on the cover page.
• Students must mention the question number clearly in their answers.
• Late submitted assignments will NOT be entertained.
• Avoid plagiarism, the work should be in your own words, copying from
students or other resources without proper referencing will result in ZERO
marks. No exceptions.
• All answers must be typed using Times New Roman (size 12, double-spaced)
font. No pictures containing text will be accepted and will be considered
plagiarism).
Submissions without this cover page will NOT be accepted.
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