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It, Interest Rate Risk, Represents The Risk A Bank's Income Might Be ...

It, interest rate risk, represents the risk a bank's income might be adversely impacted as a result of changes that are unanticipated in interest rates (Hirtle, 1998). The foregoing is a result of bank's roles as financial intermediaries, whereby they accept liabilities that are interest sensitive as well as invest in assets having the same interest sensitive properties (Hirtle, 1998). Basically, the problem stems from mismatches as represented by the maturity of assets, off balance sheet positions, and liabilities which all can help lead to volatility in both net worth, and income resulting from the rising and or falling of interest rates (Hirtle, 1998).
Derivatives have played an important role in the preceding, which has impacted global financial markets as well as a result of limiting bank exposure to the concern's of interest rate fluctuations (Hirtle, 1998). Banks have come to increasingly use derivatives as a solution to the preceding, however, such has given rise to concerns that banks are, and have been facing another form of risk as a result of the use of derivatives to solve the preceding problem. Derivatives represent a relatively cost effective means whereby banks can alter their exposure to interest rates, as opposed to the methodology employed without such instruments (Hirtle, 1998). Under the secondary method, banks could adjust their risk exposures to interest rates primarily by alteration of their asset, and liabilities composition (Hirtle, 1998). However the drawback is that such adjustments in the portfolio of banks might also result of a disruption of the overall business strategy, which could include provisions for emerging markets that would have to be either cut back, and or eliminated (Hirtle, 1998). The preceding provides an illustration how derivatives in various sectors as well as forms contributed to the stability in financial markets, even though these instruments carry, and have their own inherent risks.

Chapter 4 Conclusion
The question as to whether derivatives have an impact on global financial markets can be answered as a resounding yes. If one opts to look at derivative from the position of the meltdowns of such companies as Long Term Capital Management, loss of $4,000,000,000, Baring Brothers, loss of $1,240,500,000, and other failures of derivatives on a mass scale, one is concentrating primarily upon the failure in decision making by a few individuals and or set of circumstances that resulted in tremendous implications and impacts, as opposed to the failure of derivatives as instruments.


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