Suppose that a bank has a negative duration gap and interest rates are expected to fall. In this case the bank:
A) should hedge interest rate risk by going short in the futures market
B) should hedge interest rate risk by going long in the futures market
C) has no interest rate risk in the sense that the net interest margin will increase as rates fall.

Question

Quizplus · Accepted Answer

A negative duration gap means that the bank's liabilities are more sensitive to interest rate changes than its assets. If interest rates fall, the bank's liabilities will decrease in value more than its assets, potentially harming the bank's financial position. To hedge this risk, the bank should go long in the futures market, which would benefit from falling interest rates.

Suppose That a Bank Has a Negative Duration Gap and Interest