24-85 What Are the Expected End-Of-Year Profits or Losses If

question 26

Multiple Choice

24-85 What are the expected end-of-year profits or losses if the bank hedges its interest rate risk exposure using the swap?

• A)The bank expects to lose $0.45 million in the first year and earn $0.58 million in the second year by buying the swap to hedge against interest rate increases.
• B)The bank expects to lose $0.45 million in the first year and earn $0.58 million in the second year by selling the swap to hedge against interest rate decreases.
• C)The bank expects to earn $0.45 million in the first year,lose $0.58 million in the second year by buying the swap to hedge against interest rate increases.
• D)The bank expects to earn $0.45 million in the first year and lose $0.58 million in the second year by selling the swap to hedge against interest rate decreases.
• E)The bank will not do the swap because it has no interest rate risk exposure.

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Definitions:

R&D

Research and Development; activities in connection with corporate or governmental innovation aimed at discovering new knowledge and its application.

Past 50 Years

Referring to the time period extending back from the current date through the last five decades, often used to contextualize changes and developments.

Process Innovation

Process innovation involves the implementation of a new or significantly improved production or delivery method, enhancing efficiency and reducing costs in an organization.

Average Total Cost

The total cost of production divided by the number of units produced, representing the per unit cost of production.