Assets And Liability Management F

Assets and liability management

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Question one

The Banc one corporation like other banks uses the swaps in the management of the interest rate

exposure but for them, they opt to use another mechanism in the process of controlling the

interest rate exposure. The bank could choose to use the derivatives which eventually assist in

the management of the interest rate exposure. The derivative is the contracts which derive its

value of an organization from its performance of an asset or interest rate. According to the case

study, the management also has an option of using the strategic measures, which would assist in

the management of the interest rate exposure. For example, a borrower has a floating rate of

cost in company fund it acts as a defender to the increase in the interest rates which enables the

limit of the rise of the interest rate.

A simple analysis of the economic valuation and advanced measurement on the interest could be

the best alternative for the banks to use for the asset with sensitive to either neutral without the

use of swap.

Question two

The pros of using the swaps in the banking sector as interest rate sensitivity are the fact that it

provide the company with the huge global market regarding more efficiency through developing

covenant between more companies with different markets target and eventually resulted in an

increase in the income of $54 million for the first quarter. Swaps assist in the reduction of

uncertain of the company future cash flow which allows the organization like banks to alter their

debt term to gain more on the current market requirement. The swaps initially help in the

management of the fluctuation in the interest rates which enables the banks to have better rates as

compared to the foreign organizations. Swaps also have disadvantages like long-term lending in

the financial institutions which eventually resulted in most of the investors targeting the outside

market for the long term rates. Swaps contribute a lot to the credit risk if there is a default on the

loan, this result to more expensive to the loan hence reduces the potential of gains the benefits of

swaps.

Question three

The impact of the exchange on the bank’s interest rate sensitivity is that it enables the bank to

have effective earning of money as a result of changes made in the interest rate to the accrual

within the year, however to the accounting ratios; it reduces the interest earning which makes the

banks performance weak. On another hand, the swap has improved the bank's economic value

through the advancement of the swaps technology to the interest rates it has contributed a lot to

the long-term impact on the outcomes of the interest rates.

The swaps application in the bank like the above one is an artificial in financing the long-term

debt from the variable rate and vice versa. Therefore, the impacts to the interest rates sensitivity

on the capital ratio depend on the financial flexibility which is more evaluated by the use of the

swaps for the banking institution. Swaps contribute to the reduction of the capital amount

required by the regulatory authorities of the banks in the United States. The swaps also improve

the banks in term of liquidity through the introduction of liabilities which makes the customers

have easy accessibility, hence enables the banks to enjoy more of liquidity in short- term period

and attain economies of longer –term investment in the market.

Reference

Esty, Benjamin C., Peter Tufano, and Jon Headley (1994),"Banc One Corporation: Asset and

Liability Management." Harvard Business School Case 294-079.

Barro, Robert (1999) "Notes on Optimal Debt Management", Harvard University

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Assets and liability management f

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