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Setting Limits: Interest Rate Risk Management

Interest Rate Risk

Repricing limits

Repricing limits are set for interest rate management. These limits control exposure by controlling the volume or amount of securities that are repriced in a given time period. By staggering the repricing of the securities the company can reduce the volatility as well as control the degrees of sensitivity in the asset and liability portfolios.

Limits are often expressed as the ratio of rate sensitive assets (RSA) to rate sensitive liabilities (RSL) in a given time period. A ratio greater than one suggests that the company is asset sensitive and has more assets than liabilities subject to repricing. All factors remaining constant, the earning for the company will be reduced by falling interest rates. An RSA/RSL ratio less than one on the other hand suggests that the company is liability sensitive and its earnings may be reduced by increasing interest rates.

Other gap limits to control exposure include gap to asset ratios, gap to equity ratios and absolute limits on the net gap.

One thought on “Setting Limits: Interest Rate Risk Management”

  1. Alexandr says:

    A. NonymousJuly 21, 2009 07:11 Vendors and customers may have a drnefieft view of the price paid for these unused licenses. Customers may be thinking of average price = total license paid divided by the number of seats. Vendors, on the other hand, may be thinking of marginal price not an easily formulated number (e.g. X for the first 1/2 of the seats, X/2 for the next 40%, and X/10 for the last 10%). Often a vendor will offer additional seats or products rather than a discount on the number of seats or products a customer needs right now. This is more like a customer buying a futures investment on seats or products it may need. Customers are aware of the offered price from the vendor for a lesser number of seats or products, and aware that the last few seats are offered at a substantially lower per seat price, so they should not expect to be offered credit on the average price when seeking to return licenses. In fact, given that commissions are notoriously hard to claw back, the customer should expect to receive the marginal price paid for the additional seats, less the commission paid to the salesperson, less the costs of the return transaction (e.g. like a restocking fee paid for returns of items that lose value over time)Why do buyers purchase more seats or products than they end up needing? Of course, sometimes there are project failures, but that is the risk taken by the client when the software is licensed, and is factored into the price offered.More often, additional seats or products are purchased to satisfy some future possibility of demand by the customer. The present value of those marginal seats (or products) is lower for the buyer and the seller both will have to spend money to do a transaction in the future, and there is some probability that those seats will never be needed, so a discount needs to be applied to their value (on top of the effective interest rate used in a regular net present value calculation) to reflect their present value. Vendors prefer to offer more product rather than a lower price for many reasons, including improved financial results, ability to block future competition, and lower transaction costs plus the salesperson is incented to make the deal as large as possible to achieve higher incentive commissions.Customers are free to negotiate on the price of the desired number of seats, as well as to do so on additional seats or products; those that choose the latter approach prefer to do so because they expect to grow their number of employees or their penetration of deployment plus the purchasing department often receives incentives on percentage discount realized, so they are incented to achieve the highest possible discount, not the lowest possible price.

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