What kind of futures hedge would be appropriate in each of the following situations? a. A bank fears that rising deposit interest rates will result in losses on fixed-rate loans? b. A bank holds a large block of floating-rate loans and market interest rates are falling? c. A projected rise in market rates of interest threatens the value of the bank's bond portfolio?

What kind of futures hedge would be appropriate in each of the following situations? a. A bank fears that rising deposit interest rates will result in losses on fixed-rate loans? b. A bank holds a large block of floating-rate loans and market interest rates are falling? c. A projected rise in market rates of interest threatens the value of the bank's bond portfolio?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter4: Bond Valuation

Section: Chapter Questions

Problem 2Q: Short-term interest rates are more volatile than long-term interest rates, so short-term bond prices...

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The number of futures contracts that a bank will need in order to fully hedge its overall interest rate risk exposure and protect the net worth depends upon (among other factors): the relative duration of bank assets and the duration of the underlying security named in the futures the price of the futures All of the options are correct A financial institution that uses a long hedge is most likely: trying to avoid higher borrowing trying to avoid declining asset trying to avoid lower than expected yields from loans and trying to avoid higher borrowing costs or trying to avoid declining asset An advantage of interest rate swap is that: it can help protect from interest rate it can help closely match the maturities of assets and it can help transform actual cash flows to more closely match desired cash flow All of the options are correct Default risk on bonds can be evaluated by using: financial analysis bond ratings estimates of potential losses on bonds a and b…
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