What are the Risks of Immunizations?

Risk immunity, the so-called asset-liability management, is a means to reduce price risk. It uses the proper combination of assets and liabilities to achieve the goals of the bank, and at the same time reduces the risk of the bank. The key to this risk management is to build a balance sheet The correct combination of assets and liabilities for the items on the table.

Risk immunity

Risk immunity

In general, the duration value must be modified by dividing it by 1 + y / m, where y is the yield on the debt instrument, and m is the number of cash flows per year. This modified duration is represented by D, that is, D = D / (1 + y / m). For the calculation of the duration of an asset portfolio, if we take the market value of each individual asset divided by the total market value of the asset portfolio as a weight, the duration of the portfolio is equal to the weighted average of the duration of each individual asset. This method calculates the duration. This characteristic of the duration of the asset and liability portfolio is the key to the immune strategy. We know that fluctuations in yields will inevitably lead to changes in the prices of banks' assets and liabilities. The basic idea of the immune strategy is to make the duration of the asset portfolio exactly match the duration of the liability. Its role is to make the duration of the asset portfolio Precisely equal the duration value of the liability, which means that the value change of the asset portfolio must exactly match the value change of the liability portfolio, so that the immune strategy can effectively protect the bank assets and liabilities from the risk of changes in yield. To explain the problem, we assume that a bank now has only one debt of 10 million yuan in time deposits.The bank promises to pay depositors 1 million yuan in annual interest over the next 10 years, and the debt cash flow and its discounted value (take 10% as (Discount rate) and their contribution (product) to duration are shown in the table:

Now the bank's problem is how to invest the 10 million yuan of deposits, at least 10% per year, to ensure that the value of the assets invested at every point in the future is at least equal to the value of the liabilities. Assume that the bank now has two types of investment financial instruments, one is a 15-year long-term loan with an annual interest rate of 12%, and the other is a 6-month short-term loan with an annual interest rate of 8%. According to the same method as above, the revised duration of long-term loans is 8 091, and the revised duration of short-term loans is 0 481. According to the immune strategy, the duration value of the asset portfolio is required to be equal to the duration value of the liability. Let W1 and W2 be the weights of long-term loans and short-term loans, D1 and D2 are the corresponding durations, and DL is the total duration of the liabilities, so there are:

Substituting a known value into the above formula gives:

Solving the above equations can be obtained,

From this we have introduced that banks should invest 73 7% of their 10 million yuan funds in 15-year long-term loans, and the remaining 26 3% in 6-month short-term loans, that is, 7.37 million yuan in long-term loans, 263 Ten thousand yuan in short-term loans. The duration value of such a portfolio is exactly equal to the duration value of a liability. The change in the value of the portfolio must exactly match the change in the value of the liability, so that the risk of interest rate changes can be effectively avoided. In addition, this asset portfolio is still `` profitable '' because the return on assets exceeds the cost of liabilities, i.e. (73 7% 0 12) + (26 3 0 08) = 10 95%, and the return on the asset portfolio is over 10 95% The cost of debt was 10%. Through this example, we can see that the core of the asset-liability ratio management is by no means the simple equivalence of long-term assets to long-term liabilities and short-term assets to short-term liabilities. The portfolio value is balanced and matched in the dynamic, and the items and accounts of the balance sheet are managed as a dynamic system, so as to seek the maximum benefits of the bank. The important role of immunization strategies in asset-liability management lies in the fact that bank managers can avoid the risks of interest rate fluctuations when they apply immunization techniques when planning for future debt payments.