A bank has $500 million in long-term assets and $400 million in long-term fixed-rate liabilities. If interest rates rise, the bank's net exposure will be ________, assuming that the long-term assets and liabilities are similarly affected. Therefore the bank should focus on hedging the net exposure amount by creating a ______.

Question

A bank has $500 million in long-term assets and $400 million in long-term fixed-rate liabilities. If interest rates rise, the bank's net exposure  will be ________, assuming that the long-term assets and liabilities are similarly affected. Therefore the bank should focus on hedging the net exposure amount by creating a ______.

Quizplus · Accepted Answer

The net exposure is the difference between long-term assets ($500 million) and long-term liabilities ($400 million), which is $100 million. If interest rates rise, the value of both assets and liabilities would decrease, but the net exposure would remain. To hedge against rising interest rates (which negatively impact the value of its assets more than its liabilities), the bank should create a short hedge to protect against the decrease in the net value of its assets.

A Bank Has $500 Million in Long-Term Assets and $400