Skip to content

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 600 million and rate-sensitive liabilities of USD 450 million over a one-year horizon. If all rates rise by 50 basis points, what is the approximate change in annual net interest income, assuming the gap model applies?

Net interest income rises by about USD 0.75 million. The one-year gap is USD 150 million (600 minus 450), and multiplying by the 0.50% rate rise gives 0.75 million, as the positive gap benefits from higher rates.

  1. AIncrease of USD 0.75 millionCorrect
  2. BDecrease of USD 0.75 million
  3. CIncrease of USD 3.00 million
  4. DIncrease of USD 7.5 million

Explanation

Gap = 600 - 450 = USD 150 million. Change in NII = 150 x 0.005 = USD 0.75 million increase. Using the 50 bp on the whole 600 would give 3.0, which ignores the offsetting liabilities.

Did you get it right without looking?

One question tells you little. A timed set on Risk Management for Changing Interest Rates: Asset-Liability Management and Duration Techniques shows your real accuracy, how long you take and where you lose marks.

Practise Risk Management for Changing Interest Rates: Asset-Liability Management and Duration TechniquesFree diagnostic mock

More Risk Management for Changing Interest Rates: Asset-Liability Management and Duration Techniques questions