A financial firm is asset sensitive when it has more interest-rate sensitive assets maturing or subject to repricing during a specific time period than rate-sensitive liabilities. A liability sensitive position in contrast, would find the financial institution having more interest-rate sensitive deposits and other liabilities than rate-sensitive assets for a particular planning period.

(i) In the event if a financial institution has a Negative GAP and interest rates increases in the market, what impact will be on Net Interest Margin (NIM)? State whether NIM will increase or decrease. (1 mark)

(ii) What type of hedging option (short hedge or long hedge) should the financial institution opt for to protect itself from market interest rate risk? (2 Marks)

(iii) Derivatives are normally engaged by the financial managers to protect its institutions assets and liabilities portfolios due to mismatch of maturities. In the above given scenario, what type of options contract should be exercise by the bank?