22-63 An FI has reduced its interest rate risk exposure to the lowest possible level by selling sufficient futures to offset the risk exposure of its whole balance sheet or cash positions in each asset and liability.The FI is involved in
A)microhedging.
B)selective hedging.
C)routine hedging.
D)overhedging.
E)speculation.

Question

Quizplus · Accepted Answer

The FI has reduced its interest rate risk exposure to the lowest possible level by using futures to offset the risk exposure of its entire balance sheet or cash positions, which is a routine hedging strategy. This involves utilizing derivatives to hedge against market fluctuations in order to protect the value of the portfolio. Microhedging involves hedging individual positions, while selective hedging involves selectively hedging certain positions in the portfolio. Overhedging refers to hedging beyond the required level, while speculation involves taking positions in the market solely for the purpose of profiting from market movements.

22-63 an FI Has Reduced Its Interest Rate Risk Exposure