A lender who is worried that its cost of funds might rise during the term of a loan it has made can hedge against this rise by
A)buying futures contracts on Treasury bills.
B)selling futures contracts on Treasury bills.
C)buying call options on Treasury bills.
D)increasing the amount of money which it lends.

Question

Quizplus · Accepted Answer

Selling futures contracts on Treasury bills is a hedging strategy that allows the lender to lock in the current interest rate, thereby protecting against a rise in the cost of funds during the loan term. When the interest rate on Treasury bills rises, the value of the futures contracts falls, providing a gain that offsets the higher cost of funds. Buying futures contracts or call options would not achieve the desired hedging effect, and increasing the amount of money lent would increase the lender's exposure to interest rate risk.

A Lender Who Is Worried That Its Cost of Funds