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:

Reserve Requirement

The mandate by central banks determining the minimum amount of reserves that must be held by a commercial bank, directly affecting the bank's capacity to lend.

Excess Reserves

The capital reserves held by a bank or financial institution in excess of what is required by regulators, laws, or internal controls.

Discount Rate

The interest rate charged to commercial banks and other depository institutions for loans received from the Federal Reserve's discount window.

Minting Coins

The process of manufacturing coins as a form of currency, typically by a government or authorized agency.