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      Question

      A bank borrows Rs.50 crore from call money market on a

      daily basis and uses that to give a loan of Rs.30 crore to a AAA rated client (i.e. zero default probability over one year) at a rate of interest 2.50% over call money rate to be reset on a daily basis. The bank may see variation in its net interest income over 10 days in respect of this asset because the transaction is associated with _______
      A Market risk Correct Answer Incorrect Answer
      B Gap risk Correct Answer Incorrect Answer
      C Operational risk Correct Answer Incorrect Answer
      D Funding risk Correct Answer Incorrect Answer
      E collateral risk Correct Answer Incorrect Answer

      Solution

      A gap or mismatch risk arises from holding assets and liabilities and off-balance sheet items with different principal amounts, maturity dates or repricing dates, thereby creating exposure to unexpected changes in the level of market interest rates.

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