Suppose the bank has a positive duration gap and interest rates are expected to rise in the
Near future. The bank could hedge this interest rate risk by:
A) buying a call option
B) selling a call option
C) selling a put option
D) none of the above; the bank has no interest rate risk because its interest rate margin will increase as rates rise

Question

Quizplus · Accepted Answer

Selling a call option can help hedge against interest rate risk when a bank has a positive duration gap and expects interest rates to rise. This strategy can offset potential losses from the increase in interest rates.

Suppose the Bank Has a Positive Duration Gap and Interest