7-69 When the Assets and Liabilities of an FI Are

question 100

Multiple Choice

7-69 When the assets and liabilities of an FI are not equal in size,efficient hedging of interest rate risk can be achieved by

• A)increasing the duration of assets and increasing the duration of equity.
• B)issuing more equity and reducing the amount of borrowed funds.
• C)not exactly matching the maturities of assets and liabilities.
• D)issuing more equity and investing the funds in higher-yielding assets.
• E)efficient hedging cannot be achieved without the use of derivative securities.

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Definitions:

Inventory

Items held for sale in the ordinary course of business, as well as supplies and raw materials intended for use in producing goods for sale.

Operating Activities

Business activities that are directly related to the production and delivery of goods and services, generating revenue.

Cash Flow

The net amount of cash and cash-equivalents moving into and out of a business, crucial for assessing the liquidity of an entity.

Trading Investments

Securities that a company holds for the purpose of selling them in the near term to profit from short-term price fluctuations.