An FI Issued $1 Million of 1-Year Maturity Floating Rate

question 72

Multiple Choice

An FI issued $1 million of 1-year maturity floating rate commercial paper.The commercial paper is repriced every three months at the 91-day Treasury bill rate plus 2 percent.What is the FI's interest rate risk exposure and how can it use financial futures and options to hedge that risk exposure?

• A)The FI can hedge its exposure to interest rate increases by selling financial futures.
• B)The FI can hedge its exposure to interest rate decreases by selling financial futures.
• C)The FI can hedge its exposure to interest rate increases by buying financial futures.
• D)The FI can hedge its exposure to interest rate increases by buying call options.
• E)The FI cannot hedge its exposure to interest rate increases or decreases using financial futures

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Definitions:

Private Property

Private property is land or belongings owned by individuals or corporations rather than the state, characterized by the legal right to exclude others from its use or benefits.

Private Arbitration

A dispute resolution process where parties choose an independent third party to make a decision regarding their dispute, outside of court proceedings.

Business Disagreement

A conflict or dispute arising between parties in a business context, often over contracts, negotiations, or operations.

Bank Loan

A sum of money borrowed from a bank that must be repaid with interest over a predetermined period.