Spring 2017 a
interest rate increase, causing a decrease in PV(investments) and MV(fixed-income securities), why we would need more capital required in this investment risk?
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interest rate increase, causing a decrease in PV(investments) and MV(fixed-income securities), why we would need more capital required in this investment risk?
Comments
The capital charge is meant to reflect risk of default, illiquidity and/or market value declines in fixed income and equity. An interest rate increase which causes a decline in fixed income will cause the capital charge to rise. Or put another way, rising interest rates add more risk to the system, which means more capital needs to be held to support that