Interest Rate Risk Modeling
Chapter One
Interest Rate Risk Modeling
An Overview
Financial institutions and other market participants manage many types of
risks, including interest rate risk, credit risk, foreign exchange risk, liquidity
risk, market risk, and operational risk. This book, the first volume of
a trilogy on fixed-income modeling, gives a detailed introduction to various
modeling techniques used by practitioners for measuring and managing interest
rate risk. The importance of managing interest rate risk cannot be
overstated. The total notional amount of outstanding over-the-counter
(OTC) single-currency interest rate derivatives was about $165 trillion as of
June 2004, of which 85 percent represented swaps and forward contracts
(see Table 1.1). This amount is 62 percent higher than what it was just 18
months before in December 2002. The explosive growth of OTC interest
rate derivatives over the past quarter century suggests that managing interest
rate risk remains a chief concern for many financial institutions and
other market participants, even as U.S. interest rates have declined steadily
since reaching their peak in 1980 to 1981 ... read full excerpt from Interest Rate Risk Modeling: The Fixed Income Valuation Course ebook
