CIMA F3 Syllabus C. Financial risks - Different types of interest rate risk - Notes ^{1 / 1}

Gap Exposure

Lets say you have some receivable loans (at variable rates) and some payable loans (at variable rates). Ideally these would match each other and you wouldn’t worry about the interest rates

However if they mature at different times, you are for going to be ‘exposed’ for a period - and this may be good news (positive gap) or bad news (negative gap)

• Positive Gap - the interest bearing assets are greater than the interest paying liabilities maturing

• Negative Gap - more interest sensitive liabilities within the period

Basis Risk

This time lets presume that our variable rate receivable and payable loans are perfectly matched (in size and maturity). Therefore there is no gap exposure.

However the rates they pay may be different - as they may be BASED on different things - for example one is based on LIBOR and the other not

It means they may be the same now but in the future they may not move in line with each other.

Companies accelerating their expansion plans and increasing their demand for capital is likely to lead to an increase in interest rates.