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CMA Final · Risk Management in Banking and Insurance · Interest Rate Risk Management

Under the Basel framework for interest rate risk in the banking book (IRRBB), the Economic Value of Equity (EVE) measure focuses on:

Economic Value of Equity measures the change in the present value of expected cash flows from banking book assets, liabilities and off-balance sheet items when interest rates shift under prescribed shock scenarios. It is a long-term economic value view, unlike short-term earnings measures such as net interest income.

  1. AThe change in the present value of the bank's expected cash flows from assets, liabilities and off-balance sheet items due to rate changesCorrect
  2. BOnly the change in reported accounting profit over the next quarter
  3. CThe probability of loan defaults under rate shocks
  4. DThe bank's daily trading book loss at 99% confidence

Explanation

EVE is an economic value perspective: it measures the change in the present value of banking book cash flows (net of equity) under prescribed interest rate shock scenarios. Earnings-based measures such as NII look at short-term profit. Default probability is credit risk, and 99% daily loss describes trading book VaR.

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