Which of the following could be appropriately used to reduce the $Gap for a bank that specializes in mortgage lending?
I. Issue more ARMs
II. Securitize and sell mortgages
III. Buy futures on long term Treasury bonds
IV. Enter into a swap to pay fixed and receive a variable rate of interest

Question

Which of the following could be appropriately used to reduce the $Gap for a bank that specializes in mortgage lending? 
I. Issue more ARMs
II. Securitize and sell mortgages
III. Buy futures on long term Treasury bonds
IV. Enter into a swap to pay fixed and receive a variable rate of interest

Quizplus · Accepted Answer

Issuing more ARMs (Adjustable Rate Mortgages) and entering into a swap to pay fixed and receive a variable rate of interest both help in reducing interest rate risk by aligning the bank's assets and liabilities more closely. Securitizing and selling mortgages reduces the bank's exposure to interest rate changes by removing these assets from the balance sheet.

Which of the Following Could Be Appropriately Used to Reduce