A financial institution with a positive interest-sensitive gap and anticipating falling interest rates could protect against loss by covering the gap with a long hedge.

Question

Quizplus · Accepted Answer

A positive interest-sensitive gap means that the financial institution's interest-earning assets outweigh its interest-bearing liabilities. If the institution anticipates falling interest rates, it could potentially suffer losses as it may earn less on its assets while still having to pay out high interest on its liabilities. To protect against this, the institution could use a long hedge to lock in current interest rates and cover the gap. This would ensure that the institution's interest income remains stable even if rates fall.

A Financial Institution with a Positive Interest-Sensitive Gap and Anticipating