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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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