A bank has made fixed rate loans funded with shorter term certificates of deposit. To reduce its interest rate risk the bank could sell short term interest rate futures.

Question

Quizplus · Accepted Answer

Selling short-term interest rate futures allows the bank to hedge against the risk of rising interest rates, which would increase the cost of rolling over its short-term certificates of deposit while the income from its fixed-rate loans remains unchanged.

A Bank Has Made Fixed Rate Loans Funded with Shorter