40.The bank’s interest rate exposure is: a.higher in the short term because the

Question

40.The bank’s interest rate exposure is:

a.higher in the short term because the 91 day repricing gap is larger than the 1 year repricing gap.

b.lower in the short term because the 91 day repricing gap is smaller than the 1 year repricing gap.

c.higher in the short term because the absolute value of the 91 day repricing gap is larger than the absolute value of the 1 year repricing gap.

d.lower in the short term because the absolute value of the 91 day repricing gap is smaller than the absolute value of the 1 year repricing gap.

e.equal in both the short and long term.

41.How can the bank reduce its 1 year interest rate risk exposure?

a.Increase rate sensitive assets.

b.Decrease rate sensitive assets.

c.Increase rate sensitive assets and decrease rate sensitive liabilities.

d.Decrease rate sensitive assets and increase rate sensitive liabilities.

e.Increase rate sensitive liabilities.

I am really confused how RSA and RSL affect intrest rate exposure. Please help me!

Bank of Baruch Assets: 91 day US Treasury bills S75m 2yeaUS Treasury notes $150m 5 year corporate loans-floating rate: Liabilities: 1 year Certificates of Deposit S 225m 5 year Certificates of Deposit 35m Overnight Fed Funds Equity 105m LIBOR+150bp, quarterly roll date $ 55m 15m 10 year floating rate mortgages 4 9-month roll dates $100m

Explanation / Answer

We know the value of fixed income securities is inversely proportional to interest rates so when interest rates rise, their value decreaes..Hence if interest rates rise, assets would decrease and liabilities would also decrease..hence the net effect would be change in assets-change in liabilities..so to hedge we should increase RSA and decrease RSL as liabilitoes is greaer than assets.

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