Question 1 Answer all parts of the question a) Can a financial institution hedge both its rate-sensitive GAP and its duration GAP with the same futures position? Why or why not? (15 marks) b) Based on a forecast of rising interest rates, a financial institution with a negative rate- sensitive GAP has arranged to swap its own floating-rate obligations for payments on another institution's fixed-rate obligations. What are the potential negative consequences of the swap, if interest rates fall instead? How can the institution attempt to mitigate such negative consequences? (15 marks) c) What are the influential factors that must be considered in choosing between futures and swaps as alternatives to on-balance sheet hedging? (35 marks) d) Discuss the issues surrounding the process of selling loans along with the economic and regulatory reasons for doing so. SU (35 marks) (Total - 100 marks) Question 1 Answer all parts of the question a) Can a financial institution hedge both its rate-sensitive GAP and its duration GAP with the same futures position? Why or why not? (15 marks) b) Based on a forecast of rising interest rates, a financial institution with a negative rate- sensitive GAP has arranged to swap its own floating-rate obligations for payments on another institution's fixed-rate obligations. What are the potential negative consequences of the swap, if interest rates fall instead? How can the institution attempt to mitigate such negative consequences? (15 marks) c) What are the influential factors that must be considered in choosing between futures and swaps as alternatives to on-balance sheet hedging? (35 marks) d) Discuss the issues surrounding the process of selling loans along with the economic and regulatory reasons for doing so. SU (35 marks) (Total - 100 marks)