Question

How did banks deal with interest rate risk when asset prices became more volatile in the 1970s? In the case of adjustable rate mortgages, do you think the trade-offs offered to borrowers was fair? Why or why not?

Answer 1

The banks began to adjust the rates of the loans because in the market there is a lot of volatility and the exchange rate began to float, due to not having a real support of gold or international monetary reserves on the issuance of currency to offset the crisis, this rate adjustment made the risk of asset volatility as a consequence of a depreciation of the national currency offset to a certain extent, since at the beginning each dollar issued over time lost a significant purchasing power, so Therefore, the capacity of the initial dollars was only 20% of their initial value, at the end of the period.

The compensations offered to the borrowers were fair because they had adjustable rates, evaluations and projections of the exchange rate, the evolution of the market and external factors were carried out, these adjustment compensations implied an insurance not to pay others regarding the evolution of the economy and that people kept their mortgages apart from what was happening in the economy.