An FI with a positive duration gap (longer asset maturities than liability maturities) will benefit by purchasing a call option position to hedge against interest rate increases

Question

Quizplus · Accepted Answer

A financial institution (FI) with a positive duration gap, meaning its assets have longer maturities than its liabilities, would actually be adversely affected by rising interest rates, as the value of its longer-term assets would decrease more than its liabilities. Purchasing a call option on interest rates would not hedge against this risk; instead, purchasing an interest rate cap or entering into a pay-fixed interest rate swap would be more appropriate hedges against rising interest rates.

An FI with a Positive Duration Gap (Longer Asset Maturities