![]() Identify interest rate sensitive, income/expense generating on and off balance sheet items that will be included in the calculation. Calculating Earnings at Risk – Interest Rates data Step 4: Identify assets, liabilities & off balance sheet (OBS) instruments to be included in the calculation This is determined as follows for the given illustration. ![]() Earnings at Risk – Working with raw interest rate data Step 3: Calculated the return seriesĬalculate the returns series for all the interest rate buckets by taking the natural logarithm of the ratio of successive rates. In our example we use the PKRV rates (these are government treasury rates) at all available buckets for the determined look back period. The data is interest rate data for all available buckets. For illustration purposes let us assume a look back period from 1st January 2009 to 30th June 2009, inclusive. Step 1: Determine look back periodĭetermine the period over which the risk is to be evaluated. For the purpose of calculation, the book value of cash flows will be taken into account. ![]() The balance sheet items to be included in the calculation are those which are interest rate sensitive and generate income or expense cash flows. The approach used is a VaR based approach that takes into account non-parallel shifts in the term structure and its impact on the earnings portfolio of the bank. Earnings-at-Risk (EAR) is computed in order to evaluate the impact of interest rate change on earnings.
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