Capital Markets Examiner School, Providence, RI

Relationship Between EAR and EVE

 How can the bank have earnings exposure to rates down, but EVE exposure to rising rates (or vice versa)?  The bottom line answer is that earnings-at-risk measures short-term risk exposure, and EVE-at-risk measures long-term risk exposure.  It comes down to a short-term/long-term trade-off.  For example, buying longer-term 7-10 year bonds will probably have a positive impact on your overall margin today and in the immediate future (because it creates more spread). But continue that strategy long enough in a rising rate environment and your gains from investing longer-term will be eaten up by rising funding costs over time.

MODEL OUTPUTS EXERCISE