Explanation:
Banks manage interest rate risk (IRR) by ensuring that the repricing characteristics of their assets and liabilities are aligned within specific timeframes. This strategy, known as repricing gap management, minimizes the exposure to changes in interest rates by matching the timing of rate adjustments for both sides of the balance sheet.
A is incorrect: Repricing gap management focuses on specific repricing timeframes, not the entire balance sheet using derivatives (which is a portfolio approach).
B is incorrect: EME banks historically have made limited use of derivatives, focusing more on repricing gap management.
D is incorrect: Time deposits are generally more expensive than demand deposits but offer greater funding stability.
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Q.6350 Regarding interest rate risk (IRR) management by banks, which of the following statements is correct?
A
Repricing gap management focuses on matching the interest rate sensitivity of the entire balance sheet using derivatives.
B
Hedging with derivatives is the primary method used by EME banks to manage IRR.
C
Matching interest rate sensitivity involves aligning the repricing of assets and liabilities within specific timeframes.
D
Time deposits are generally less expensive than demand deposits and offer greater funding stability.
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