A financial institution can hedge its interest rate risk by:

Solutions

Expert Solution

Financial futures contract is the most tool used by the most banks and many financial institutions. Under this contract parties are agreed to take delivery and undertake delivery at a specified price agreed well before for a certain future date. It decreases the interest rate risk drastically.

Hence, A financial institution can hedge its interest rate risk by entering financial futures contract.

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

Know how a firm can hedge its interest rate risk on a short-term fixed or variable...

Know how a firm can hedge its interest rate risk on a short-term fixed or variable rate bank loan or on a fixed or variable rate short-term investment using the interest rate futures market. Be able to explain how there is a gain or loss if a firm with a variable rate bank loan expects interest rates to rise and attempts to hedge this expected interest rate risk in the interest rate futures market.

An asset-sensitive financial institution will typically hedge its position to avoid lower net interest income by:...

An asset-sensitive financial institution will typically hedge its position to avoid lower net interest income by: Using an interest rate cap. Executing a long hedge. Using an interest rate collar. Executing a put option Assume that the US Central Bank increases market interest rates. Your bank’s net interest margin will likely decrease as a result if your bank has: A negative Interest-sensitive ratio. Relative interest-sensitive gap of zero. A balance sheet that is liability-sensitive. A balance sheet that is...

A- how the financial institution manager manage the interest rate risk? B- What is the definition...

A- how the financial institution manager manage the interest rate risk? B- What is the definition of the financial institution manager ?

What type of interest rate risk will be occurred when Financial Institution holds liabilities with maturity...

What type of interest rate risk will be occurred when Financial Institution holds liabilities with maturity that are greater than the maturities of its assets? Explain what will be the impact on earnings when there are changes in the rate of interest. Justify your answer with support.

Financial institution use four major strategies to manage interest -rate risk. Select two for these strategies...

Financial institution use four major strategies to manage interest -rate risk. Select two for these strategies and describe how they are used to manage interest-rate risk.

Briefly explain one internal hedging technique that financial institution may use to manage interest rate risk....

Briefly explain one internal hedging technique that financial institution may use to manage interest rate risk. Why might it be impossible to eliminate the risk completely? Define each of the following hedging techniques and explain how each is used to minimize interest rate risk a) Global cash netting b) Embedded options in debt c) Forward Rate Agreements d) Zero-Coupon Swaps

One of the financial risk is currency risk. How can we hedge the currency risk associated...

One of the financial risk is currency risk. How can we hedge the currency risk associated with the proposed trade? While you should show familiarity with the theoretical approach to such hedging, you should primarily focus on practical implementation of the strategy (what financial instruments and why, where can we access such instruments, what back office organizational systems do we need for financial instrument hedging, when should we hedge and why). THIS IS IN REGARDS TO UBER.

Money market hedge can be used to hedge a firm’s translation exposure to exchange rate risk....

Money market hedge can be used to hedge a firm’s translation exposure to exchange rate risk. Is this statement true or false? Why?

One strategy that is used to hedge interest rate risk is to match the modified duration...

One strategy that is used to hedge interest rate risk is to match the modified duration of assets and liabilities. If we hedge the above bond in question 7 with a zero coupon bond, what would be the maturity of said zero.

A financial institution is charging a 13 percent interest rate on a $15,000,000 loan. The bank...

A financial institution is charging a 13 percent interest rate on a $15,000,000 loan. The bank also charged $150,000 in fees to originate the loan. The bank has a cost of funds of 9 percent. The borrower has a five percent chance of default, and if default occurs, the bank expects to recover 90 percent of the principal and interest. What is the risk of the loan using the Moody's Analytics model? Briefly discuss the importance of this model.

Subjects