Introduction
The problems of using derivatives as a risk management tool by financial institutions have been demonstrated in the Banc One case. The major objective of this paper is to provide more insight into the case through analysis of five specific questions in relation to Banc One’s performance between 1993 and 1994.
We start by addressing the bank’s problems and potential reasons that lead to such issues. Evidences and facts show that both investors and managers blame the use of interest rate swaps for causing the significant decrease in its share price.
We then provide a detail instruction on the bank’s interest rate risk management process and identified key tools used in the process. Despite the changes in different types of swaps …show more content…
We have recommended the best option and steps for Banc One to solve this issue in order to effectively hedge its risks while reemphasize its share price. Our recommendation includes education or trainings through prospectus-type materials (simplified forms), informing managers and analyst individually, providing transparency and more detailed information of specific swaps transactions, analysing its swap-trading procedures and constructing simpler types of swap transactions it could …show more content…
As 0f 1994, its share price dropped even further when the deal was expected to be completed. Both investors and management had been questioning Banc One’s increasing use of derivatives (especially interest rate swaps), which was considered as the dominant factor that lead to the reduction of share value.
2. How does Banc One manage its interest rate exposure and what role do derivatives play in its interest-rate risk management?
2.1 Interest Rate Risk Management Processes
The interest rate exposure of Banc One is a function of the impact of interest rate changes on its financial earnings or the calculation of earnings’ sensitivity. As a result of the sensitivity calculation, Banc One was classified as an asset sensitive company as most of its assets would have contractual changing relationship with the market rate. Instead, its liabilities were primarily consisted of fixed-rate items, which would make its earnings higher as interest rate rose.
The methods to manage interest rate exposure ad0pted by Banc One had superior performance in the U.S. banking industry. Specifically, this paper will analyse Banc One’s risk management practices in 5 different time periods.
2.11 Prior to the
The problems of using derivatives as a risk management tool by financial institutions have been demonstrated in the Banc One case. The major objective of this paper is to provide more insight into the case through analysis of five specific questions in relation to Banc One’s performance between 1993 and 1994.
We start by addressing the bank’s problems and potential reasons that lead to such issues. Evidences and facts show that both investors and managers blame the use of interest rate swaps for causing the significant decrease in its share price.
We then provide a detail instruction on the bank’s interest rate risk management process and identified key tools used in the process. Despite the changes in different types of swaps …show more content…
We have recommended the best option and steps for Banc One to solve this issue in order to effectively hedge its risks while reemphasize its share price. Our recommendation includes education or trainings through prospectus-type materials (simplified forms), informing managers and analyst individually, providing transparency and more detailed information of specific swaps transactions, analysing its swap-trading procedures and constructing simpler types of swap transactions it could …show more content…
As 0f 1994, its share price dropped even further when the deal was expected to be completed. Both investors and management had been questioning Banc One’s increasing use of derivatives (especially interest rate swaps), which was considered as the dominant factor that lead to the reduction of share value.
2. How does Banc One manage its interest rate exposure and what role do derivatives play in its interest-rate risk management?
2.1 Interest Rate Risk Management Processes
The interest rate exposure of Banc One is a function of the impact of interest rate changes on its financial earnings or the calculation of earnings’ sensitivity. As a result of the sensitivity calculation, Banc One was classified as an asset sensitive company as most of its assets would have contractual changing relationship with the market rate. Instead, its liabilities were primarily consisted of fixed-rate items, which would make its earnings higher as interest rate rose.
The methods to manage interest rate exposure ad0pted by Banc One had superior performance in the U.S. banking industry. Specifically, this paper will analyse Banc One’s risk management practices in 5 different time periods.
2.11 Prior to the