What is the interest rate risk exposure of the optimal transaction in the previous question over the next 2 years?
A)The risk that interest rates will rise since the FI must purchase a 2-year CD in one year.
B)The risk that interest rates will rise since the FI must sell a 1-year CD in one year.
C)The risk that interest rates will fall since the FI must sell a 2-year loan in one year.
D)The risk that interest rates will fall since the FI must buy a 1-year loan in one year.
E)There is no interest rate risk exposure. [Refer to: 9-95]

Question

Quizplus · Accepted Answer

The optimal transaction involves selling a 1-year CD and purchasing a 2-year CD in one year. Therefore, the FI is exposed to the risk that interest rates will rise during this one-year period, since they will be locked into a lower interest rate for the 2-year CD while having to sell the 1-year CD at a lower rate.

What Is the Interest Rate Risk Exposure of the Optimal