A bank has made long-term fixed-rate mortgages and has financed them with short-term deposits. To hedge out its interest rate risk, the bank could ________.

Question

Quizplus · Accepted Answer

The bank is exposed to the risk of rising interest rates, which would increase the cost of its short-term deposits relative to the fixed income from its long-term mortgages. By selling T-bond futures, the bank can hedge against this risk, as the value of T-bond futures typically decreases when interest rates rise, offsetting the bank's potential losses.

A Bank Has Made Long-Term Fixed-Rate Mortgages and Has Financed