Capital Markets School - October 2023

Internal Use Only

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)?

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Internal Use Only

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 .

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