A financial institution with a negative gap can reduce the risk of loss due to changing interest rates by:

Question

Quizplus · Accepted Answer

A negative gap means that the institution's interest-sensitive liabilities exceed its interest-sensitive assets. To reduce interest rate risk, it can extend asset maturities to lock in current rates (A), increase short-term liabilities to match the duration of assets and liabilities more closely (B), or use derivatives like futures or options to hedge against interest rate movements (C).

A Financial Institution with a Negative Gap Can Reduce the Risk