22-20 An FI with a negative duration gap is exposed to interest rate declines and could hedge its interest rate risk by buying forward contracts.

Question

Quizplus · Accepted Answer

A negative duration gap means that the FI's liabilities are more sensitive to interest rate changes than its assets. When interest rates decline, the value of liabilities increases more than the value of assets, leading to potential losses. Buying forward contracts can hedge against this risk by locking in future interest rates.

22-20 an FI with a Negative Duration Gap Is Exposed