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Assume that a bank obtains most of its funds from large CDs with a one year...

  1. Assume that a bank obtains most of its funds from large CDs with a one year maturity. Its assets are in the form of loans with rates that adjust every six months. The bank would be _______ affected if interest rates increase. To partially hedge its position, it could _______ futures contracts.

    adversely; purchase

    favorably; sell

    favorably; purchase

    adversely; sell
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Answer #1

Answer: The correct option is "favorably; purchase"
Given that the assets of the bank are in the form of loans with monthly adjusting rates, so if the interest rate increases, the earnings of the bank will increase, in that way the bank would be favorably affected. So, to partially hedge its position, it could purchase futures contracts.

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