Capital Markets Examiner School, Providence, RI

Relationship Between EAR and EVE

 Why do they often seem to contradict one another?

 How can the bank have earnings exposure to rates down, but EVE exposure to rising rates (or vice versa)?

Relationship Between EAR and EVE

 The biggest reason why is that we don't measure earnings-at- risk by adding up the present values of all future earnings flows. Typically only look at a one-year time frame (you have the same problem even if you look at a two or three year time frame).  EVE reflects the sensitivity of all periods , while EAR is measured for just a single defined period .