?NIIi = (¬GAP¬i) ?Ri = (RSAi-RSLi) ?R¬I
Here,
?NIIi = Change in the net interest income in the i th bucket
(¬GAP¬i) = BDT size of the gap between the book value of rate-sensitive assets and rate-sensitive liabilities in maturity bucket i
?Ri = Change in the level of interest rates impacting assets and liabilities in the i th bucket.
RSAi = Rate sensitivity assets
RSLi = Rate sensitivity liabilities
? When RSAi and RSLi are mismatched, the changes in interest impact is;
o If the gap is positive, means, RSAi is higher than RSLi, increase in interest rate will increase interest revenue.
o If the gap is positive, means, RSAi is higher than RSLi, decrease in interest rate will decrease interest revenue.
o If the gap is negative, means, RSAi is lower than RSLi; increase in interest rate will increase interest expenses.
o If the gap is negative, means, RSAi is lower than RSLi, decrease in interest rate will decrease interest expense.
? Mismatch between RSAi and RSLi is not desirable as the mismatch exposes risk, can be understood from above properties.
MULTIPLE DISCRIMINANT ANALYSIS:
MDA (Multiple Discriminant Analysis) is a statistical technique used to classify an observation into one of several a priori groupings dependent upon the observation's individual characteristics. It is used primarily to classify and make predictions in problems where the dependent variable appears in qualitative form, for example, bankrupt or non bankrupt. Therefore the first step is to establish group classifications.
After the groups are established, data are collected for the objects in the groups. MDA in its most simple form attempts to derive a linear combination of these ch ...