Interest Risk Margin
Hi, the equation in BattleActs here is the ABS(A-B). However, in the current MCT guideline section 5.1.2, it says it is "determined as the greater of zero and A − B" (I omitted C). Did they update the formula?
But even if they did, their equation still does not make sense to me, according to your "Puzzler" section in BA, the margin should be non-zero when asset sensitivity is smaller than liability sensitivity, and perhaps zero the other way around. So the guideline should have said "as the greater of zero and B - A"?
Thanks!
Comments
If you combine Steps D and E together in 5.1.2, you will reach the same logic of ABS(A-B). It's basically just algebra and manipulating the negative signs. It just makes it simpler to say ABS(A-B)
The puzzler is highlighting something that doesn't make sense about this method of calculating the interest rate risk margin though. The guideline is the guideline though