hard · Frm Part 2 Liquidity & Treasury Risk
A Treasury department is managing Interest Rate Risk in the Banking Book (IRRBB). They observe that in a rising rate environment, the Net Interest Income (NII) is projected to increase, while the Economic Value of Equity (EVE) is projected to decline significantly.
What structural feature of the balance sheet most likely explains this discrepancy?
- The bank has a positive repricing gap (rate-sensitive assets > rate-sensitive liabilities) but a long duration gap (D_A > (L)/(A) D_L).
- The bank has effectively used receive-fixed swaps to immunize EVE, which naturally causes NII to increase as the floating leg pays more.
- The bank is liability-sensitive in the short term, causing NII to rise as liabilities reprice slower than assets.
- The bank’s non-maturity deposits (NMDs) have a zero duration, making EVE insensitive to rate shocks while NII captures the spread.
Sign up free to see the explanation and track your rank →
More Frm Part 2 Liquidity & Treasury Risk practice
- What is the bank's Liquidity Coverage Ratio (LCR), and does it meet the minimum Basel III
- To immunize the economic value of equity against a parallel rate shift, what is the requir
- How would a new $10 billion long-term mortgage (RSF factor 85%) funded by $10 billion in n
- Which lens of Interest Rate Risk in the Banking Book (IRRBB) would show a significant loss
- A bank has 100bn of securities classified as 'Held-to-Maturi… — If interest rates rise and
- A bank's balance sheet shows total assets of 100bn with a modified duration ofDA = 5.0and
- A bank's 'Survival Horizon' in a liquidity stress test is defined as:
- For the NSFR, a residential mortgage with a maturity over one year typically receives whic