medium · Frm Part 2 Liquidity & Treasury Risk
A bank calculates its 'Economic Value of Equity' (EVE) sensitivity to a +200 bps parallel rate shock. It identifies that its long-duration fixed-rate mortgage assets are funded by non-maturity deposits (NMDs).
If the bank's modeled deposit 'beta' is 30%, but the actual market beta rises to 70% during the rate hike, what is the impact on EVE?
- EVE will increase because the bank earns more interest income.
- The increase in beta reduces the effective duration of the liabilities, hedging the assets.
- There is no impact on EVE because deposits are carried at amortized cost.
- EVE will decline significantly more than predicted.
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