A commercial bank recognizes that its net income suffers whenever interest rates increase.Which of the following strategies would protect the bank against rising interest rates?
A) Entering into an interest rate swap where the bank receives a fixed payment stream, and in return agrees to make payments that float with market interest rates.
B) Purchase principal only (PO) strips that decline in value whenever interest rates rise.
C) Enter into a short hedge where the bank agrees to sell interest rate futures.
D) Sell some of the bank's floating-rate loans and use the proceeds to make fixed-rate loans.
E) Buying inverse floaters.

Question

Quizplus · Accepted Answer

Entering into a short hedge by selling interest rate futures would protect the bank against rising interest rates, as the value of the futures would increase when interest rates rise, offsetting the bank's losses.

A Commercial Bank Recognizes That Its Net Income Suffers Whenever