The profits of a financial institution with interest-rate sensitive liabilities and interest rate-insensitive assets are ____ with hedging than without hedging if interest rates decrease.

Question

Quizplus · Accepted Answer

When interest rates decrease, the cost of interest-rate sensitive liabilities decreases, potentially increasing profits. However, with hedging, the institution may have locked in higher rates, leading to lower profits compared to not hedging.

The Profits of a Financial Institution with Interest-Rate Sensitive Liabilities