Certainly! Here is a step-by-step solution with clear explanations as requested. --- **Step 1: Introduction to the Concept** **Interest Rate Risk and Repricing Gap** - **Rate-sensitive assets (RSA)** are assets that will mature or reprice (i.e., have their interest rates reset) within a certain time period, here within one year. - **Rate-sensitive liabilities (RSL)** are liabilities that will mature or reprice within one year. - The **repricing gap** is the difference between RSA and RSL for a given period (here, one year). - It's used to assess a bank’s exposure to interest rate changes: - If RSA > RSL, the institution is "asset-sensitive" and benefits from rising rates, but is hurt by falling rates. - If RSA < RSL, it is "liability-sensitive" and benefits from falling rates, but is hurt by rising rates. --- **Step 2: Calculate One-Year Rate-Sensitive Assets (RSA)** We include only those asset amounts that mature or reprice within one year: 1. **Cash:** - $50 (always rate-sensitive because it's available immediately) 2. **Investments:** - **Australian Treasury Bonds:** - Maturity within 6 months: $120 - Maturity within 6-12 months: $60 - **Municipal Bonds:** - Both mature in >1 year (ignore) - **Corporate Bonds:** - Both mature in >1 year (ignore) **Subtotal for Investments:** $120 + $60 = $180 3. **Loans:** - **Residential Mortgages:** - Both fixed and floating have durations >1 year (ignore) - **Corporate Loans:** - Maturity within 1-2 years: $270 (but only the portion expected to mature or reprice within 1 year; duration is 1.1 years. We'll assume none matures within 1 year, since duration is slightly above 1 year. If we estimate portion, can pro-rate: $270 × (1/1.1) ≈ $245.5, but standard for "maturity within 1 year" is to exclude. We'll ignore for now.) - **Consumer Loans:** - Duration: 0.5 years, so entire $180 is rate-sensitive. **Subtotal for Loans:** $180 4. **Other Long-term Assets:** - Duration: 2 years (ignore) **Total One-Year RSA:** - Cash: $50 - Investments: $180 - Consumer Loans: $180 - **Total = $410** --- **Step 3: Calculate One-Year Rate-Sensitive Liabilities (RSL)** Include only liabilities that mature or reprice within one year: 1. **Deposits:** - Six-month Term Deposits: $465 - Five-year Term Deposits: $0 (maturity >1 year) - Certificates of Deposit: - Six-month CDs: $115 - Two-year CDs: $0 (maturity >1 year) **Subtotal for Deposits:** $465 + $115 = $580 2. **Borrowings:** - Short-term Borrowings (<1 year): $130 - Long-term Borrowings: $0 (maturity >1 year) **Subtotal for Borrowings:** $130 3. **Other Long-Term Liabilities:** - Maturity >1 year (ignore) **Total One-Year RSL:** - Deposits: $580 - Borrowings: $130 - **Total = $710** --- **Step 4: Calculate the Cumulative Repricing Gap** **Cumulative Repricing Gap (within 1 year) = RSA - RSL** - **RSA = $410** - **RSL = $710** - **Repricing Gap = $410 - $710 = -$300** --- **Step 5: Final Answer and Summary** **Final Answer:** - The one-year rate-sensitive assets are **$410**. - The one-year rate-sensitive liabilities are **$710**. - The cumulative one-year repricing gap is **-$300**. --- **Step 6: What We Did in Each Step (Summary)** - **Step 1:** Introduced the concepts of rate-sensitive assets/liabilities and repricing gap. - **Step 2:** Identified and summed all assets maturing or repricing within one year. - **Step 3:** Identified and summed all liabilities maturing or repricing within one year. - **Step 4:** Calculated the difference (repricing gap). - **Step 5:** Provided the final concise answer. - **Step 6:** Summarized the process. --- **In summary:** We identified all assets and liabilities that mature or reprice within one year, summed them up, and subtracted liabilities from assets to get the one-year repricing gap, which is **-$300**. This means the institution is liability-sensitive within the one-year horizon and is exposed to losses if interest rates rise.