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CMA Final · Risk Management in Banking and Insurance · Introduction to Risk Management

A bank's asset-liability team finds that its rupee assets reprice mostly after three years, while most of its deposits reprice within one year. If market interest rates rise sharply, which risk is the bank primarily exposed to through this mismatch?

The bank faces interest rate risk, specifically repricing mismatch. Its deposits reprice within a year while assets reprice after three years, so a rise in rates increases funding costs faster than asset income, which reduces net interest income.

  1. AInterest rate risk arising from repricing mismatchCorrect
  2. BSettlement risk arising from payment failures
  3. CSovereign risk arising from country default
  4. DLegal risk arising from contract unenforceability

Explanation

Liabilities reprice faster than assets, so funding cost rises before asset yields adjust, squeezing net interest income. This is repricing (gap) risk within interest rate risk. Settlement risk concerns failure of counterparties to deliver at settlement, which is not described here.

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