If a bank has a gap of -$10 million,it can reduce its interest-rate risk by
A) paying a fixed rate on $10 million and receiving a floating rate on $10 million.
B) paying a floating rate on $10 million and receiving a fixed rate on $10 million.
C) selling $20 million fixed-rate assets.
D) buying $20 million fixed-rate assets.

Question

Quizplus · Accepted Answer

A negative gap indicates that the bank is more sensitive to interest rate decreases. By paying a fixed rate and receiving a floating rate, the bank can hedge against the risk of interest rates falling, as it will benefit from the floating rate income.

If a Bank Has a Gap of -$10 Million,it Can