Future options are particularly useful for offsetting risk created when a bank ________.
A) extends option-like commitments to bank customers
B) has the right to borrow at a fixed-rate in the future
C) has a loan portfolio of primarily fixed-rate loan products
D) is involved in gold and other inflation-hedging instruments

Question

Quizplus · Accepted Answer

When a bank extends option-like commitments to its customers, it creates risk for itself as it may have to fulfill these commitments at a cost. Future options can be used to offset this risk by allowing the bank to hedge against potential losses if the customers exercise their option-like commitments.

Option B is not relevant to offsetting risk created by the bank. Option C may create interest rate risk, but it is not specifically related to future options. Option D is also not directly related to the use of future options to offset risk.

Future Options Are Particularly Useful for Offsetting Risk Created When