Keeping all other factors constant, banks can reduce the volatility of net interest income by:

Question

Quizplus · Accepted Answer

Adjusting the dollar amount of rate-sensitive assets (choice A) and using interest rate swaps (choice C) are both effective methods for reducing the volatility of net interest income. By adjusting the dollar amount of rate-sensitive assets, banks can maintain a balanced interest rate risk profile and protect against sudden changes in interest rates. Meanwhile, interest rate swaps can be used to manage exposure to interest rate fluctuations by exchanging cash flows and effectively taking on fixed-rate assets and liabilities. Adjusting the dollar amount of fixed-rate liabilities (choice B) can help reduce interest rate risk, but it may not have as significant an impact on overall net interest income volatility as the other two choices. Therefore, the best choice is a. and c. only.

Keeping All Other Factors Constant, Banks Can Reduce the Volatility