1. **Yield Curve Risk:** - Banks face risk when pricing assets and liabilities based on different benchmarks. - Non-parallel movements in yield curves impact Net Interest Income (NII). - Evaluation of yield curve movements is crucial to understand the portfolio and income impact. - Yield curve risk is a type of basis risk related to different maturity benchmarks for liabilities and assets. 2. **Embedded Option Risk:** - Market interest rate changes prompt prepayment and exercise of options, affecting bank profitability. - Faster and higher interest rate changes increase embedded option risk, reducing projected cash flow and income. - Particularly experienced in volatile situations, embedded option risk is a reality in India. 3. **Reinvestment Risk:** - Uncertainty in future cash flow reinvestment interest rates poses a risk. - Mismatches in cash flows expose banks t...
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