The emergence of the derivatives market has led to the creation of investment securities with complex cash flow profiles. Investment professionals, using derivatives, can customize a security’s structure to the investor’s risk/reward profile of choice. As a result, investors now have more investment choices. The increasing complexity of many of the securities, however, has complicated asset/liability risk measurement and management decisions. A decline in interest rates can cause significant amounts of prepayments and early redemptions for FHLBanks holding a large percentage of their portfolio in securities with options. The yields.
