When the Assets and Liabilities of an FI Are Not

question 74

Multiple Choice

When the assets and liabilities of an FI are not equal in size, efficient hedging of interest rate risk can be achieved by

• A)increasing the duration of assets and increasing the duration of equity.
• B)issuing more equity and reducing the amount of borrowed funds.
• C)not exactly matching the maturities of assets and liabilities.
• D)issuing more equity and investing the funds in higher-yielding assets.
• E)efficient hedging cannot be achieved without the use of derivative securities.

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Definitions:

Operations

Refers to the ongoing activities of a business involved in the production or provision of goods and services.

Variable Costing

An accounting method that includes only variable production costs (materials, labor, and overhead) in the cost of goods sold, treating fixed costs as period expenses.

Absorption Costing

An accounting method that captures all the manufacturing costs, including both fixed and variable costs, associated with producing a specific product.

Fixed Manufacturing Overhead

Costs associated with manufacturing that do not vary with the level of production, such as rent, salaries of supervisors, and depreciation of factory equipment.