How can a bank hedge when it makes 1-year fixed-rate loans and finances them with 3-month floating-rate deposits?
A)Buy Eurodollar futures contracts.
B)Sell put options on Eurodollar futures contracts.
C)Sell Eurodollar futures contracts.
D)Buy call options on Eurodollar futures contacts.
E)b.and c.

Question

Quizplus · Accepted Answer

The bank can hedge against the risk of rising interest rates by selling Eurodollar futures contracts. This action would offset potential losses from the fixed-rate loans if interest rates increase, as the value of the futures contracts would increase, compensating for the higher cost of funding from floating-rate deposits.

How Can a Bank Hedge When It Makes 1-Year Fixed-Rate