Which of the following would require a short hedge?
A) The bank anticipates a decline in interest rates.
B) The bank has a positive GAP.
C) The bank is liability sensitive.
D) All of the above require a short hedge.
E) None of the above require a short hedge.

Question

Quizplus · Accepted Answer

A short hedge is used to protect against losses if interest rates increase. Therefore, it would only be necessary if the bank is liability sensitive, meaning that a rise in interest rates would increase the bank's liabilities and potentially hurt their profitability. A positive GAP (B) means that a bank's assets are greater than their liabilities, and while it may cause some interest rate risk, it does not necessarily require a short hedge. Anticipating a decline in interest rates (A) would actually be a reason to take on more risk, as it could lead to higher profits from lending activities.

Which of the Following Would Require a Short Hedge