Multiple Choice 1- Static GAP analysis is useful for: a) Highlighting reprising
ID: 2799792 • Letter: M
Question
Multiple Choice 1- Static GAP analysis is useful for: a) Highlighting reprising mismatches on an FI's balance sheet. b) Constructing a fully immunized bond portfolid c) Measuring an FI's liquidity risk position d) All of the above e) None of the above 2- Fire sale risk is related most closely to a) Credit risk b) Currency risk c) Liquidity or Refinancing risk d) Market risk e) None of the above The primary liability for life insurance companies is a) Life insurance policies and annuities b) Fire insurance policies c) Interest rate swaps d) None of the above 3-Explanation / Answer
1) The correct answer is a. The Static Gap Analysis is a measure of exposure or sensitivity to interest rates. Static gap is calculated as the difference between assets and liabilities of comparable repricing periods. Minus signs in the calculated gap indicate that you have a greater number of liabilities than assets maturing at that particular maturity, and therefore have an exposure to rising rates.
2) The correct option is d. Fire Sale refers to a situation where securities are sold at a heavy discount. This is majorly when the company is in financial distress. The challenge for investors is making the decision to purchase securities during a fire sale. When the market is having a fire sale on stocks, for example, it means that the overall market sentiment is that it is a bad time to own stocks.
3) The Correct option is a. Since it is a Life Insurance company, it will be liable for Life Insurance Policies and Annuities.
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