Outline What Is Meant by the CGAP Effect and Explain

question 25

Essay

Outline what is meant by the CGAP effect and explain the relationship between interest rate changes and changes in net interest income.Specifically, indicate whether a FI would wish to hold a negative or positive CGAP and under which interest rate conditions.

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Definitions:

Strike Price

The strike price is the fixed price at which the holder of an option can buy (in the case of a call) or sell (in the case of a put) the underlying security or commodity.

LEAPS

Long-Term Equity Anticipation Securities, which are options contracts with expiration dates longer than one year, providing a long-duration investment or hedging opportunity.

Strike Price

The specified price at which the holder of an option can buy (call option) or sell (put option) the underlying asset or security until the expiration date.

Call Option

A financial contract that gives the buyer the right, but not the obligation, to buy a stock, bond, commodity, or other asset at a specified price within a specific time period.