An FI with a negative duration gap is exposed to interest rate declines and could hedge its interest rate risk by buying forward contracts.

Question

Quizplus · Accepted Answer

A financial institution (FI) with a negative duration gap has liabilities that are more sensitive to interest rate changes than its assets. If interest rates decline, the value of its liabilities could increase more than the value of its assets, leading to a potential loss. By buying forward contracts, the FI can hedge against this risk by locking in future interest rates, thus protecting against the adverse effects of declining rates.

An FI with a Negative Duration Gap Is Exposed to Interest