A Bank Has a Negative Duration Gap and Wishes to Hedge

question 46

Multiple Choice

A bank has a negative duration gap and wishes to hedge to use an interest rate swap to hedge its interest rate risk. The bank should

• A) pay a variable rate of interest and receive a fixed rate of interest.
• B) pay a fixed rate of interest and receive a variable rate of interest.
• C) pay a fixed rate of interest and receive a fixed rate of interest.
• D) pay a variable rate of interest and receive a variable rate of interest.

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Definitions:

Confidence

A measure of the degree to which one is certain about a particular prediction or outcome.

Predetermined Time

A technique in time and motion study where standard times are assigned to basic motions and tasks, used for setting standard times for work activities.

Standard Deviation

A numerical indicator that calculates the spread or variability among a collection of data points.

Standard Time

The time set for the completion of a task, often used as a benchmark in manufacturing and other operations to measure efficiency.