Skip to content

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 repricing within one year exceed rate-sensitive liabilities repricing within one year. Assuming all rates move by the same amount, which parallel rate move would be expected to reduce the bank's one-year net interest income?

A fall in rates would reduce net interest income for a positive one-year gap bank. More assets than liabilities reprice within the year, so income drops by more than funding costs when rates decline. A rise in rates would instead raise net interest income.

  1. AA rise in all interest rates
  2. BA fall in all interest ratesCorrect
  3. CAny parallel shift, since gap affects only market value
  4. DNo change, because the gap is measured at book value

Explanation

With a positive gap, more assets than liabilities reprice within the horizon. When rates fall, interest income declines by more than interest expense, so net interest income falls. A rate rise would increase it. Gap analysis is an earnings (NII) measure, not a market value measure.

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