Which of the following statements is true?
A)An FI that has a positive on-balance-sheet gap and a negative off-balance-sheet gap is not sure about interest movements.
B)An FI that has a positive on-balance-sheet gap and a negative off-balance-sheet gap has made a mistake in hedging its interest rate risk.
C)An FI that has a positive on-balance-sheet gap and a negative off-balance-sheet gap is using its off-balance-sheet position to hedge its on-balance-sheet position.
D)None of the listed options are correct.

Question

Quizplus · Accepted Answer

An FI that has a positive on-balance-sheet gap and a negative off-balance-sheet gap is using its off-balance-sheet position to hedge its on-balance-sheet position. This means that the FI is relying on its off-balance-sheet activities (such as future interest rate swap agreements) to "offset" the interest rate risk it faces on its on-balance-sheet assets and liabilities. This is a common risk-management strategy for financial institutions.

Which of the Following Statements Is True