The economic value of equity at risk
In order to analyse the impact of interest rate change on the change in value of e-Bank’s equity, you apply the duration formula to both assets and debt:
Δ(economic value) = Δ(value of assets) – Δ(value of deposits)
Let us call the assets ‘A’ and the deposits ‘D’:
Playing with mathematics yields this intuitive relation:
The percentage change in the economic value of equity of the bank is the product of three terms: its leverage, the duration mismatch between assets and debt, and the change in interest rate. ...
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