Skip to content

CMA Final · Strategic Financial Management · Risks in Financial Market

A bank has the following one-year gap position: rate-sensitive assets Rs 900 crore, rate-sensitive liabilities Rs 1,200 crore. Market rates rise by 0.5% uniformly for all rate-sensitive items. A further Rs 100 crore of the liabilities are found to be fixed-rate and were wrongly included in the Rs 1,200 crore figure. What is the correct change in net interest income, and its direction?

Net interest income falls by Rs 1.00 crore. After removing the fixed-rate Rs 100 crore, rate-sensitive liabilities are Rs 1,100 crore against assets of Rs 900 crore, a negative gap of Rs 200 crore. A 0.5% rate rise multiplies this gap, reducing income because liabilities reprice faster than assets.

  1. ADecrease of Rs 1.00 croreCorrect
  2. BDecrease of Rs 1.50 crore
  3. CIncrease of Rs 1.00 crore
  4. DDecrease of Rs 0.50 crore

Explanation

Correct rate-sensitive liabilities = 1,200 - 100 = Rs 1,100 crore. Gap = 900 - 1,100 = -Rs 200 crore. Change in NII = -200 x 0.5% = -Rs 1.00 crore. Rs 1.50 crore uses the uncorrected gap of -300. Rs 0.50 crore applies the rate rise to a gap of -100. An increase has the wrong sign for a liability-sensitive bank facing rising rates.

Did you get it right without looking?

One question tells you little. A timed set on Risks in Financial Market shows your real accuracy, how long you take and where you lose marks.

Practise Risks in Financial MarketFree diagnostic mock

More Risks in Financial Market questions