A bank has made long term fixed rate mortgages and has financed them with short term deposits.To hedge out the bank's interest rate risk they could ________.

Question

Quizplus · Accepted Answer

The bank is exposed to the risk of rising interest rates, which would increase the cost of their short-term deposits relative to the fixed income from the mortgages. Selling T-bond futures would profit from rising interest rates (which cause bond prices to fall), thus offsetting the bank's risk.

A Bank Has Made Long Term Fixed Rate Mortgages and Has