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ACCA Applied Skills · Financial Management · The nature and types of risk and approaches to risk management

Which of the following best describes interest rate gap risk faced by a company?

Interest rate gap risk is the risk that interest-bearing assets and liabilities reprice at different times, so net interest income or margin changes when rates move. It stems from a timing mismatch in repricing, not from currency exposure or counterparty default.

  1. AThe risk that a company's share price falls when market interest rates rise
  2. BThe risk that a lender will default on its loan agreement with the company
  3. CThe risk that interest-bearing assets and liabilities reprice at different times, so the net interest margin changesCorrect
  4. DThe risk that the company's cash flows are denominated in a currency other than its home currency

Explanation

Gap risk arises from a mismatch in the timing of repricing of assets and liabilities, for example floating-rate borrowings repricing before fixed-rate deposits mature. Default by a lender is counterparty risk, and cash flows in foreign currency give exchange rate risk, so those options describe other risks.

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