18. Microhedge: Asset Fixed-rate: e.g. a municipal bond with a coupon rate of 5% Floating-rate: e.g. C&I loan priced at LIBOR+1% Liability FI issued a floating-rate note priced at LIBOR+4% FI plans to issue CDs in three months

1) What is the FIs interest rate exposure? Explain?

2) What kind(s) of financial instruments can the FI use to hedge the interest rate risk? Specify the position to take (e.g., long/short, buy/sell).

19. Macrohedge: A financial institution has short-term or variable rate assets funded by long-term fixed rate liabilities (negative duration gap). A financial institution has fixed rate long-term assets funded by short-term or variable rate liabilities (positive duration gap).

1) What is the FIs interest rate exposure? Explain?

2) What kind(s) of financial instruments can the FI use to hedge the interest rate risk? Specify the position to take (e.g., long/short, buy/sell).