If a bank sells interest rate futures, it ____ the potential adverse effect of rising interest rates and ____ the potential favorable effect of declining interest rates on its interest expenses.
A)reduces; reduces
B)increases; increases
C)reduces; increases
D)increases; reduces

Question

Quizplus · Accepted Answer

Selling interest rate futures allows a bank to hedge against the risk of rising interest rates, which would increase its interest expenses. This action reduces the bank's exposure to higher costs. However, it also means the bank won't benefit as much from declining interest rates, which could have lowered its expenses, thus reducing the potential favorable effects.

If a Bank Sells Interest Rate Futures, It ____ the Potential