Question
The ALCO has obtained the following information on the interest rate sensitivity of your bank: Amount Rate 90 day Interest rate-sensitive assets $160,000 4.0% 90
The ALCO has obtained the following information on the interest rate sensitivity of your bank:
Amount Rate
90 day Interest rate-sensitive assets $160,000 4.0%
90 day Interest rate-sensitive liabilities $240,000 3.0%
The consensus of forecasting is for interest rates to increase by 50 basis points during the ninety days. But a significant minority of forecasters expects rates to fall by 50 basis points.
i. How could the bank eliminate its interest rate risk?
ii. What could happen to net interest income if the minority forecast turned out to be the correct one?
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