A commercial bank recognizes that its net income suffers whenever interest rates increase. Which of the following strategies would protect the bank against rising interest rates?
A) entering into an interest rate swap where the bank receives a fixed payment stream, and in return agrees to make payments that float with market interest rates.
B) purchase principal only (po) strips that decline in value whenever interest rates rise.
C) enter into a short hedge where the bank agrees to sell interest rate futures.
D) sell some of the bank's floating-rate loans and use the proceeds to make fixed-rate loans.
E) buying inverse floaters.

Question

Quizplus · Accepted Answer

Given its interest rate exposure, the bank needs a strategy which is profitable whenever interest rates rise. If designed correctly, the profits from this strategy can partially, or in some cases, completely offset the losses the bank realizes from its basic operations whenever rates rise. Of the 5 strategies, only the short hedge is profitable when rates riseσall the other strategies would make sense if the bank were looking for extra profits when rates dropped.

A Commercial Bank Recognizes That Its Net Income Suffers Whenever