Zenith Commercial Bank's ALCO is evaluating the re-pricing risk for the 0-90 days' time bucket. The following quarterly data is available: Financial…

CA Final · Advanced Financial Management · PYQS · May 2026
Zenith Commercial Bank's ALCO is evaluating the re-pricing risk for the 0-90 days' time bucket. The following quarterly data is available: Financial Data: Rate Sensitive Assets (RSAs):12,500 CroresRate Sensitive Liabilities (RSLs):15,800 CroresQuarterly Net Interest Income (NII):450 Crores Risk Policy: The bank's Earnings at Risk (EaR) limit is 8% of quarterly NII. Hedging is mandatory if the potential NII impact in any scenario exceeds this threshold. You are required to: (i) Identify the Gap Position (Positive/Negative) and determine which of the following scenarios is favourable for the bank's NII, providing a brief justification: Scenario A: Repo rate increase of 50 bps.Scenario B: Repo rate decrease of 25 bps. (ii) Calculate the Earnings at Risk (EaR) in ₹ Crores and as a percentage of NII for both scenarios. Based on the bank's risk policy, advice whether management should activate hedging strategies or not.

Suggested Answer and Working Notes:

(i) Gap Position & Favorability Gap Calculation:12,500 crore -15,800 crore = -3,300 Crore (Negative Gap)Un-Favorable Senario: Senario A (50 bps). In a negative (liability-sensitive) gap, increase in rates causes liabilities to reprice upward more than assets, leading to a decrease in Net Interest Income.Favorable Senario: Senario B (-25 bps). In a negative (liability-sensitive) gap, a decrease in rates causes liabilities to reprice downward more than assets, leading to an increase in Net Interest Income. (ii) EAR in two different scenarios Scenario A: EAR = (RSA – RSL) x Change in Interest Rate x (1/4) = (12500crore -15800 crore) x 0.50% x (1/4) EAR = -4.125 crore Or (12500crore – 15800 crore) x 0.50% x (90/365) = -4.0685 crore EAR in %= -4.125/450=-0.9167% Or -4.0685/450=-0.90411% Bank Ear = 8% x 450 Crore = 36 crore Since EAR - 0.9167% Or 0.90410% is less than EaR 8% limits no need of hedging. Scenario B: EAR = (RSA – RSL) x Change in Interest Rate x (1/4) = (12500crore -15800 crore) x (- 0.25%) x (1/4) EAR = 2.0625 crore Or = (12500crore -15800 crore) x (- 0.25%) x (90/365) EAR = 2.0342 crore EAR in % = 2.0625/450 = 0.4583% or 0.4521% Since Value is positive no need of hedging.

Topics: Interest Rate Risk Management

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