A savings and loan association has long-term fixed-rate mortgages financed by short-term funds. It hedges by selling Treasury bond futures. If interest rates decline, and many mortgages are prepaid

Question

Quizplus · Accepted Answer

If interest rates decline, the value of the futures contracts will decrease, resulting in a loss. This loss will more than offset any favorable effects from the prepayment of mortgages, as the hedging strategy was designed to protect against rising rates, not falling rates.

A Savings and Loan Association Has Long-Term Fixed-Rate Mortgages Financed