A bank makes a long term loan and funds the loan by issuing certificates of deposit today, at three months, six months and nine months. To hedge the interest rate risk of issuing the CDs, the bank enters into futures contracts with maturities of 3, 6 and 9 months. Which type of hedge is described by this strategy?

Question

Quizplus · Accepted Answer

A strip hedge involves using futures contracts with different maturities to hedge against interest rate risk, matching the timing of the cash flows from the CDs.

A Bank Makes a Long Term Loan and Funds the Loan