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FRM Part II · FRM Exam Part II · Risk Management for Changing Interest Rates: Asset-Liability Management and Duration Techniques

A bank has rate-sensitive assets of USD 400 million and rate-sensitive liabilities of USD 550 million over a one-year horizon. Management expects all market rates to rise by 1 percentage point, with rate-sensitive items repricing fully. What is the expected change in annual net interest income under a simple repricing gap analysis?

Net interest income falls by USD 1.5 million. The one-year repricing gap is negative USD 150 million, meaning liabilities reprice more than assets, so a 1 percentage point rate rise raises funding costs by more than it raises asset income.

  1. ADecrease of USD 1.5 millionCorrect
  2. BIncrease of USD 1.5 million
  3. CDecrease of USD 5.5 million
  4. DIncrease of USD 4.0 million

Explanation

Gap = 400 - 550 = -150 million. Change in NII = gap x change in rate = -150 x 0.01 = -1.5 million. The increase option has the wrong sign. The USD 5.5 million option applies the rate rise to liabilities only.

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