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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 the following balance sheet items repricing within one year: rate-sensitive assets of $420 million and rate-sensitive liabilities of $520 million. Total assets are $1,000 million. If all rates rise by 1.50% uniformly, what is the approximate change in one-year net interest income?

Net interest income falls by about $1.5 million. The one-year gap is $420 million minus $520 million, or negative $100 million, and multiplying this by a 1.5% rate increase gives negative $1.5 million, because more liabilities than assets reprice upward.

  1. A-$1.5 millionCorrect
  2. B+$1.5 million
  3. C-$6.3 million
  4. D-$15.0 million

Explanation

Gap = 420 - 520 = -$100 million. Change in NII = gap x change in rate = -100 x 0.015 = -$1.5 million. Using the asset base for the product (-$6.3 million) mistakenly applies the rate to RSA alone, and -$15.0 million is a decimal slip.

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