Literature Review Essay:
You are required to write a Literature Review essay of 2,500 words related to the following topics:
Changes in banks’ competitive environment, products, and services have heightened the importance of prudent interest rate risk management. Historically, the interest rate environment for banks has been fairly stable, particularly in the decades following World War II. More recently, interest rates have become more volatile, and banks have arguably become more exposed to such volatility because of the changing character of their liabilities. ‘The level and volatility of interest rates and the increase in worldwide financial market integration make the measurement and management of interest rate risk one of the key issues facing financial institutions’ managers.’ (Saunders and Cornett, 2014, p199).
Evaluate the above statement by fully discussing:
What the causes/sources of interest rate risk (IRR) are
How IRR affects financial institutions
How to measure and manage IRR by financial institutions
For Paper A, you should emphasise on Section I - Sources and Effects of Interest Rate Risk. The rest of sections are relating to regulatory issues that are not central to the module.
For Paper B, You should understand how to use derivatives to manage IRR and associated benefits and weaknesses in general terms. You don’t need to understand all the detailed formulae in relation to derivatives
