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sir i was studying the gap exposure, in it the interest sensitive asset and liabilities is i don’t understand.
i want clarify what it means to interest sensitive asset and liabilities exactly, is it that this intruments are variable interest rates or that they CAN BE FIXED OR VARIALBE RATE but their market value changes with change in interest rates???Gap exposure refers to the risk that a business may face due to mismatches between the maturity of its interest-bearing assets and interest-bearing liabilities.
In other words, it is the potential vulnerability of a business to changes in interest rates. When the interest-sensitive liabilities (such as loans or bonds) exceed the interest-sensitive assets (such as investments or deposits), there is a gap exposure.
To summarise, gap exposure refers to the risk arising from the difference between interest-sensitive assets and liabilities.
In the interest bearing asset or liability..is the interest rate fixed or variable?
In the context of interest-bearing assets or liabilities, the interest rate can be either fixed or variable.
Interest-sensitive assets and liabilities refer to financial instruments whose values or cash flows are directly affected by changes in interest rates. These instruments can include both fixed-rate and variable-rate assets and liabilities. The key characteristic is that their market values or cash flows change in response to changes in interest rates.
For example, if interest rates increase, the market value of fixed-rate assets may decrease, while the market value of variable-rate assets may increase.
Similarly, the interest payments on fixed-rate liabilities remain constant, while the interest payments on variable-rate liabilities may change with fluctuations in interest rates.It is important to note that the sensitivity of these assets and liabilities to interest rate changes may vary depending on their specific terms and conditions.
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