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Answers to Case Study – Norwest Corporation

Q1. Discuss limitations in the reliability of the interest rate-sensitivity gap. As implied in the case, the methodology is to classify assets and liabilities in terms of the time to certain repricing events (maturity, adjustment upon a change in market rates, amortization of a portion of principal, expected prepayment of certain assets, and early withdrawal of liabilities before maturity). What factors would you cite to show weaknesses in the precision of the methodology for creating the interest rate-sensitivity gap report?

Limitations in the reliability of the interest rate-sensitivity gap as follows:

Gap analysis does not capture basis risk or investment risk, is generally based on parallel shifts in the yield curve, does not incorporate future growth or changes in the mix of the business, and doest not account for the time value of money. Moreover, simple gap analysis (based on contractual term to maturity) assumes that the timing and amount of assets ...

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