
Repricing Opportunity
A repricing opportunity is a change in the market environment that allows for a reassessment of the value of an investment. A bank can minimize its interest-rate risk and maximize its net interest income by minimizing the differences between its assets, such as adjustable-rate mortgages, and its liabilities, such as the rate of interest it pays on customer deposits or certificates of deposit, whenever these periodic repricing opportunities come up on the products. In the banking sector, repricing opportunities are periods when interest-rate sensitive assets and liabilities are up for adjustment. This repricing opportunity led many investors to reduce their exposure to the energy sector, something that was clearly shown in benchmark exchange-traded funds like Vanguard's Energy ETF (VDE) which fell 45% from July 2014 and January 2016. Changes in interest rates, for example, affect almost every type of asset and can create repricing opportunities in the banking and capital markets in particular.
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What is a Repricing Opportunity?
A repricing opportunity is a change in the market environment that allows for a reassessment of the value of an investment. This can happen with stocks, bonds or other types of investments. The change that precipitates a repricing opportunity vary. Changes in interest rates, for example, affect almost every type of asset and can create repricing opportunities in the banking and capital markets in particular.
Understanding Repricing Opportunities
The changes that lead to a repricing opportunity may be company specific, sector specific or market wide. In some instances, the term repricing opportunity is used as a softer way to refer to situations where an asset has seen a worsening in its fundamentals.
For example, the oil price collapse in 2014 was a repricing opportunity for the entire upstream oil sector. While the oil prices were high, even companies with weak balance sheets and high costs-per-barrel were seeing profits. When prices collapsed, a large segment of the market was producing to cover bills rather than to drive profits. This repricing opportunity led many investors to reduce their exposure to the energy sector, something that was clearly shown in benchmark exchange-traded funds like Vanguard's Energy ETF (VDE) which fell 45% from July 2014 and January 2016.
Industry Specific Repricing Opportunities
In business, there are two additional usages of repricing opportunity. In retail and sales, a repricing opportunity is created when the demand for a product is much lower or higher than expected. When the demand is higher than expected, the product can be repriced higher to capture more profit. When the demand is lower than projected, the product can be repriced downwards to encourage more sales. The products in question are usually physical goods that have a shelf life, inventory cost or production lag that makes accurate pricing to the available volume important to the seller.
In the banking sector, repricing opportunities are periods when interest-rate sensitive assets and liabilities are up for adjustment. Banks earn income from interest, so their income fluctuates with changes in interest rates. When they issue loans or sell certificates of deposit, they embed repricing opportunities into the contracts to allow for periodic adjustment. This helps reduce the risks that the interest rate will go up or down in a way that negatively impacts the bank's return. A bank can minimize its interest-rate risk and maximize its net interest income by minimizing the differences between its assets, such as adjustable-rate mortgages, and its liabilities, such as the rate of interest it pays on customer deposits or certificates of deposit, whenever these periodic repricing opportunities come up on the products.
Related terms:
Adjustable-Rate Mortgage (ARM)
An adjustable-rate mortgage is a type of mortgage in which the interest rate paid on the outstanding balance varies according to a specific benchmark. read more
Bond : Understanding What a Bond Is
A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate. read more
Certificate of Deposit (CD)
A certificate of deposit (CD) is a bank product that earns interest on a lump-sum deposit that's untouched for a predetermined period of time. read more
Commodity Price Risk
Commodity price risk is price uncertainty that adversely impacts the financial results of those who both use and produce commodities. read more
Depression
An economic depression is a steep and sustained drop in economic activity featuring high unemployment and negative GDP growth. read more
Fundamentals
Fundamentals consist of the basic qualitative and quantitative information that underlies a company or other organization's financial and economic position. read more
Inflation
Inflation is a decrease in the purchasing power of money, reflected in a general increase in the prices of goods and services in an economy. read more
Menu Costs
Menu costs are the costs incurred by firms when they change their prices. read more
Net Interest Income
Net interest income reflects the difference between the revenue from a bank's interest-bearing assets and expenses on its interest-bearing liabilities. read more