Question

Discuss how a bank manager should adjust the bank's six-month re-pricing gap to take advantage of an anticipated rise or fall in the interest rate in the next six months.

Answer 1

When interest rates are expected to rise, a bank should set its repricing gap to a positive position. In this case, as rates rise, interest income will rise by more than interest expense. The result is an increase in net interest income. When interest rates are expected to fall, a bank should set its repricing gap to a negative position. In this case, as rates fall, interest income will fall by less than interest expense. The result is an increase in net interest income.

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