If a bank sells interest rate futures, it ____ of rising interest rates and ____ of declining interest rates on its interest expenses.
A) reduces the potential adverse effect; reduces the potential favorable effect
B) increases the potential adverse effect; increases the potential favorable effect
C) decreases the potential adverse effect; increases the potential favorable effect
D) increases the potential adverse effect; decreases the potential favorable effect

Question

Quizplus · Accepted Answer

When a bank sells interest rate futures, it hedges against the possibility of rising interest rates, therefore reducing the potential adverse effect on its interest expenses. However, by doing so, it also reduces the potential favorable effect of declining interest rates.

If a Bank Sells Interest Rate Futures, It ____ of Rising