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December 12, 2014

Evaluating Derivatives—Part I: Earnings

While derivatives can be a good tool for mitigating interest rate risk, it is important for credit unions to understand the cost of the protection they are purchasing. This example uses an interest rate swap with the following terms to illustrate: 7-year term Notional amount: $100 million Credit union pays fixed rate of 2.00% Credit […]

September 26, 2014

Isolating Interest Rate Risk with a Static Balance Sheet

Some will say that a static balance sheet income simulation achieves its objective of isolating interest rate risk by reducing the variables in the simulation. The question then is: What risk should be isolated? Interest rates change and cash flows do not change Interest rates change and cash flows change in response If the answer […]

September 11, 2014

Why Are My Income Simulation Results so Strong in a Shock?

In performing model validations for credit unions, we often see income simulation results that show significant improvement in net interest income (NII) and net income (NI) as rates rise, even for credit unions that have material positions in long-term, fixed-rate assets.  Why does this happen, and is it reasonable? Income simulations are commonly run with […]

August 8, 2014

Testing the Budget’s Interest Rate Risk

Budgeting season is around the corner. Credit unions will spend valuable time and resources over the next few months developing budgets that achieve ROA and net worth goals. As the budgeting process moves forward and nears completion, decision-makers should ask: What happens to our interest rate risk if the budget comes true? Budgeting helps credit […]

August 1, 2014

Is Your Interest Rate Risk Model Incorporating the Risk of Deposit Mix Changes?

Recently, we blogged about interest rate risk (IRR) modeling methodologies that can give credit unions a false sense of security. (See blog titled “Is Your Risk Methodology Giving You a False Sense of Security?” Posted on July 3, 2014.) We noted that traditional income simulation seldom incorporates the risk of non-maturity deposit withdrawals or member […]

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