A Savings and Loan Association Has Long-Term Fixed-Rate Mortgages Financed

question 74

Multiple Choice

A savings and loan association has long-term fixed-rate mortgages financed by short-term funds. It hedges by selling Treasury bond futures. If interest rates decline, and many mortgages are prepaid

• A)the gain on the futures contracts offsets the loss on the mortgages.
• B)the gain on the mortgages offsets the loss on the futures contracts.
• C)the gain on the futures contracts more than offsets any unfavorable effects on mortgages.
• D)a loss on the futures contracts more than offsets the favorable effect on the mortgage portfolio.

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