Measuring Interest Rate Risk: PVBP, Hedging strategies, Duration, and Sensitivity Approaches in Banking

Interest rate risk is quantified using sensitivity-based measures that translate small yield changes into price and P&L impacts, enabling precise hedging and portfolio construction. This article explains core methods: the sensitivity approach, price value of a basis point (PVBP), portfolio PVBP computation, hedging using PVBP, other practical PVBP applications, and duration. Measurement of interest rate…

Fixed Income Securities in India: Bonds, Government Role, Market Structure, and Valuation (with Worked G‑Sec Pricing)

Fixed income securities deliver scheduled cash flows via interest and principal, with India’s debt markets operating under RBI (sovereign, money markets) and SEBI (corporate bonds) oversight. What is a bond? A bond is a debt contract where an issuer raises funds and commits to periodic coupons and principal redemption at maturity, first sold in primary…

Organizational Framework for Trading and Market Risk Management: Structures, Policies, and Strategies

Market risk in banking demands a well-defined organizational structure, robust strategies, and disciplined policies. Effective frameworks not only protect banks from financial shocks but also align trading activities with regulatory expectations and shareholder interests. Let us explore how banks structure themselves to manage market risk and trading activities, and how strategies, policies, and procedures work…

Understanding Trading Portfolio Risks in Banks: Interest Rate, Market, Credit, and Beyond

Risk management lies at the core of banking operations, ensuring stability, regulatory compliance, and sustainable profitability. In a dynamic financial environment, banks face a wide spectrum of risks—ranging from market-driven volatility to model errors—that must be identified, measured, and mitigated through systematic policies and strategies. Below is a comprehensive overview of the major risks associated…

What is hedging of Agri-Commodity Price Risk?

The Reserve Bank of India in its press release today (May 28,2015) advised banks to encourage large agricultural borrowers such as agricultural commodity processors, traders, millers, aggregators, etc., to hedge their risks related to agricultural commodity prices. Banks provide a number of credit facilities to customers engaged in activities related to agriculture.  One of the…

A Complete Guide to Credit Derivatives: CDS, TRS, Credit Options, and CLNs

Credit derivatives have become one of the most significant innovations in modern financial markets. They allow institutions to transfer and manage credit risk without necessarily transferring the underlying asset. By doing so, they provide critical flexibility in risk management, investment strategies, and capital optimization. What is a Credit Derivative? A credit derivative is a financial…

Credit Risk Models in India: From PD–LGD–EAD to RAROC and Risk-Based Pricing

Credit risk models quantify and manage the likelihood and impact of borrower default across individual exposures and portfolios. They inform underwriting, pricing, provisioning, capital allocation, portfolio steering, and performance measurement, making them a core pillar of modern bank risk governance and profitability. Credit risk models in India support underwriting, provisioning, capital computation, portfolio steering, and…

Understanding Portfolio Credit Risk: Systematic, Unsystematic, Concentration, and Correlation Risks

Portfolio credit risk is the aggregate risk arising from a collection of credit exposures, driven by macroeconomic conditions, borrower-specific factors, exposure concentrations, and inter-linkages across obligors and sectors. This article explains the key risk drivers—systematic risk, unsystematic/idiosyncratic/diversifiable risk, concentration risk, and correlation risks—and frames how banks can measure and manage them in practice. Systematic risk…

Understanding the Credit Rating System: A Key to Safer Banking

Credit rating has become an indispensable tool in modern finance, especially for banks that continuously assess risks in lending. It not only ensures that banks minimize their exposure to defaults but also helps investors and regulators make informed decisions. Let’s explore what credit rating is, why it matters, and how both internal and external rating…

Analyzing Risk at Every Level: Business, Financial, Industry, and External Risk Factors

A robust credit assessment distinguishes between obligor/borrower risk, business (operating) risk, and financial risk, then evaluates how these risks interact across industry, entity, and portfolio levels. This integrated view helps align underwriting with risk appetite, price loans for risk, and anticipate early warning signals. Obligor/borrower risk Obligor risk refers to the borrower’s overall capacity and…