Skip to content

FRM Part II · FRM Exam Part II · Risk Management for Changing Interest Rates: Asset-Liability Management and Duration Techniques

Which statement best describes a key limitation of repricing (gap) analysis compared with duration-based measures of interest rate risk?

The key limitation is that bucketed repricing gap analysis ignores cash flow timing within each bucket and mainly captures earnings effects, not changes in the market value of assets and liabilities, which duration-based measures capture through present value sensitivity.

  1. AGap analysis within buckets ignores the timing of cash flows inside each bucket and the effect of rate changes on market valueCorrect
  2. BGap analysis cannot be used to estimate changes in net interest income
  3. CGap analysis requires assuming rates follow a stochastic process
  4. DGap analysis measures only the exposure of liabilities and not assets

Explanation

Repricing gaps group items into time buckets, ignoring differences in timing within each bucket and focusing on earnings rather than economic value. Duration captures present value sensitivity. The other options misstate what gap analysis does.

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