How Do You Interpret the Position of an FI with a Positive

question 35

Multiple Choice

How do you interpret the position of an FI with a positive on-balance-sheet gap and a negative off-balance sheet gap?

• A)The FI uses its on-balance-sheet activities to hedge its off-balance-sheet activities.
• B)The FI uses its off-balance-sheet activities to hedge its on-balance-sheet activities.
• C)The FI believes that interest rates will increase and made a mistake in setting its gap for off-balance-sheet activities.
• D)The FI believes that interest rates will increase and made a mistake in setting its gap for on-balance-sheet activities.

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Definitions:

Internal Rate of Return

A metric used in financial analysis to estimate the profitability of potential investments.

Cash Flows

The grand total of financial transactions affecting a company's inflow and outflow, significantly impacting its liquid capital.

Investment

The action or process of investing money for profit or material result.

Internal Rate of Return

The discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero, used in capital budgeting.