If an organisation has a repricing gap equal to a negative $30 million,a 500 basis point increase in interest rates will cause profits to:
A) rise by $15 million.
B) rise by $1.5 million.
C) fall by $15 million.
D) fall by $1.5 million.

Question

Quizplus · Accepted Answer

A repricing gap equal to a negative $30 million means that the organization's liabilities will be more affected by a 500 basis point increase in interest rates compared to its assets. As a result, a 500 basis point increase in interest rates will lead to a decrease in profits. The amount of the decrease will be equal to the repricing gap multiplied by the change in interest rates, which is $30 million x 5 = $150 million. Since the question asks for the change in profits, we need to divide this amount by 1000 to get the answer in millions, which is $150 million / 1000 = $1.5 million. Therefore, the profits will fall by $1.5 million. The correct answer is choice D.

If an Organisation Has a Repricing Gap Equal to a Negative