Question
If a bank has a negative IS gap and interest rates are rising, managements most possible response is to: a. Increase interest-sensitive liabilities or decrease
If a bank has a negative IS gap and interest rates are rising, managements most possible response is to:
a. Increase interest-sensitive liabilities or decrease interest-sensitive assets
b. Increase interest-sensitive assets or decrease interest-sensitive liabilities
c. Lengthen maturities of assets
d. Shorten maturities of liabilities
A financial institution that is asset-sensitive will typically hedge its position to avoid lower net interest income by:
a. Using an interest rate collar.
b. Executing a long hedge.
c. Executing a put option.
d. Trying to avoid lower borrowing costs
In an interest-rate swap:
a. Both the net amount of interest due and the amount borrowed (notional amount) usually flows to one or the other party to the swap
b. The transaction usually combines an interest rate cap and an interest rate floor
c. Only the net amount of interest due usually flows to one or the other party to the swap
d. A borrowing institutions objective is not to manage interest rate risk
The most typical interest-rate hedging problem financial institutions face is:
a. Avoiding a fall in borrowing costs
b. Avoiding a fall in interest returns expected from loans and security holdings
c. Avoiding a positive relative interest sensitive gap
d. Avoiding a negative interest sensitive gap
Advantage of a back-end maturity policy is:
a. Maximizing income potential from security investments if market interest rates rise
b. Reduces investment income fluctuations
c. Maximizing income potential from security investments if market interest rates fall
d. Maximize potential for earnings
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