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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's one-year cumulative repricing gap is positive: rate-sensitive assets (RSA) exceed rate-sensitive liabilities (RSL) over that horizon. Assuming all rates move by the same amount, which scenario would hurt the bank's net interest income over the one-year horizon?

A parallel fall in rates hurts a bank with a positive one-year repricing gap. More assets than liabilities reprice within the year, so interest income drops by more than interest expense, and net interest income declines in proportion to the gap.

  1. AA parallel fall in interest ratesCorrect
  2. BA parallel rise in interest rates
  3. CNo change in the yield curve
  4. DA rise in rates that affects only long-term fixed-rate assets

Explanation

Change in NII is approximately gap times change in rate. With a positive gap, a fall in rates reduces income on assets more than it reduces interest cost on liabilities, so NII declines. A rise in rates would help.

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