Learning objectives: Discuss how asset-liability management strategies can help a bank hedge against interest rate risk. Describe interest-sensitive gap management and apply this strategy to maximize a bank’s net interest margin. Describe duration gap management and apply this strategy to protect a bank’s net worth. Discuss the limitations of interest-sensitive gap management and duration gap management
Questions:
20.18.1. Suppose that Acme Bank reports interest-sensitive assets (ISA) of $490.0 million and interest-sensitive liabilities (ISL) of $610.0 million. Recall that the relative interest-sensitive gap (aka, Relative IS GAP) is equal to the Dollar IS GAP divided (aka, scaled) by the size of the bank (where IS assets is a valid measure of size). Respectively, what is the bank's relative IS GAP; its interest-sensitivity ratio (ISR); and the impact of rising interest rates on its net interest margin (NIM)?
a. The Relative IS GAP is -120.0; the ISR is 1.245; rising interest rates will lower the NIM
b. The Relative IS GAP is -0.245; the ISR is 0.803; rising interest rates will lower the NIM
c. The Relative IS GAP is -0.245; the ISR is 1.245; rising interest rates will increase the NIM
d. The Relative IS GAP is +4.08; the ISR is 0.803; rising interest rates will increase the NIM
20.18.2. Fulcrum Bank carries (interest-sensitive) assets of $240.0 million with an average asset duration of 5.0 years. It's liabilities amount to $170.0 million with an average liability duration of 3.0 years. If yields (aka, interest rates) increase by 2.0%, which is nearest to the estimated change in the bank's net worth?
a. Decrease by $13.80 million
b. Decrease by $650,000
c. Increase by $333,000
d. Increase by $5.9 million
20.18.3. In regard to asset-liability management and duration techniques, each of the following statements is true EXCEPT which is false?
a. A solvent bank (i.e., total assets exceed total liabilities) by definition must have a positive duration gap
b. A limitation of duration gap management is that it is often difficult to find assets and liabilities of the same duration to fit into the bank's portfolio
c. A disadvantage of interest-sensitive gap management is that it analyzes the impact of interest rate changes on the bank’s net income, but neglects impacts on the market value of the bank’s equity capital position
d. According to duration gap analysis, the bank is fully hedged when the dollar-weighted duration of its assets portfolio equals the dollar-weighted duration of its liability portfolio; aka, zero duration gap position
Answers here:
Questions:
20.18.1. Suppose that Acme Bank reports interest-sensitive assets (ISA) of $490.0 million and interest-sensitive liabilities (ISL) of $610.0 million. Recall that the relative interest-sensitive gap (aka, Relative IS GAP) is equal to the Dollar IS GAP divided (aka, scaled) by the size of the bank (where IS assets is a valid measure of size). Respectively, what is the bank's relative IS GAP; its interest-sensitivity ratio (ISR); and the impact of rising interest rates on its net interest margin (NIM)?
a. The Relative IS GAP is -120.0; the ISR is 1.245; rising interest rates will lower the NIM
b. The Relative IS GAP is -0.245; the ISR is 0.803; rising interest rates will lower the NIM
c. The Relative IS GAP is -0.245; the ISR is 1.245; rising interest rates will increase the NIM
d. The Relative IS GAP is +4.08; the ISR is 0.803; rising interest rates will increase the NIM
20.18.2. Fulcrum Bank carries (interest-sensitive) assets of $240.0 million with an average asset duration of 5.0 years. It's liabilities amount to $170.0 million with an average liability duration of 3.0 years. If yields (aka, interest rates) increase by 2.0%, which is nearest to the estimated change in the bank's net worth?
a. Decrease by $13.80 million
b. Decrease by $650,000
c. Increase by $333,000
d. Increase by $5.9 million
20.18.3. In regard to asset-liability management and duration techniques, each of the following statements is true EXCEPT which is false?
a. A solvent bank (i.e., total assets exceed total liabilities) by definition must have a positive duration gap
b. A limitation of duration gap management is that it is often difficult to find assets and liabilities of the same duration to fit into the bank's portfolio
c. A disadvantage of interest-sensitive gap management is that it analyzes the impact of interest rate changes on the bank’s net income, but neglects impacts on the market value of the bank’s equity capital position
d. According to duration gap analysis, the bank is fully hedged when the dollar-weighted duration of its assets portfolio equals the dollar-weighted duration of its liability portfolio; aka, zero duration gap position
Answers here:
