Suppose the bank has a positive dollar gap and interest rates are expected to fall in the
Near future. The bank could hedge this interest rate risk by:
A) buying a call option
B) selling a call option
C) buying a put option
D) none of the above; the bank has no interest rate risk because its net interest margin will increase as rates fall

Question

Quizplus · Accepted Answer

Buying a call option on interest rates or interest rate-sensitive securities allows the bank to benefit from rising interest rates, which is a hedge if they have a positive dollar gap and expect rates to fall. This is because a positive dollar gap means the bank will lose on net interest income if rates fall, so the call option can offset some of this loss if rates unexpectedly rise instead.

Suppose the Bank Has a Positive Dollar Gap and Interest