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.

---

Definitions:

Trading Securities

Financial securities purchased by a company, not intended for long-term investment but rather for making a profit in the near term from their sale or trade.

Unrealized Holding Loss

A decrease in the value of an investment that has not yet been sold for cash.

Income Statement

A financial report that shows a company's revenues, expenses, and net income over a specific period.

Unrealized Loss

A reduction in value experienced by retaining an asset whose price has fallen, but has not been liquidated yet.