If an organisation has a repricing gap equal to a positive $20 million,a 500 basis point increase in interest rates will cause profits to:
A) rise by $1.0 million.
B) rise by $10 million.
C) fall by $1.0 million.
D) fall by $10 million.

Question

Quizplus · Accepted Answer

The repricing gap is a measure used to assess the difference in the amount of assets and liabilities that are subject to interest rate changes within a specific time period. A positive repricing gap indicates that the amount of rate-sensitive assets exceeds the amount of rate-sensitive liabilities. Therefore, if interest rates increase, the organization will earn more on its assets than it will pay out on its liabilities, leading to an increase in profits. A 500 basis point increase (or 5%) on a $20 million positive gap results in an additional $1 million in profit ($20 million * 0.05 = $1 million).

If an Organisation Has a Repricing Gap Equal to a Positive