How do you interpret the position of an FI with a negative on-balance-sheet gap and a positive off-balance-sheet gap?
A)The FI uses its on-balance-sheet activities to hedge its off-balance-sheet activities.
B)The FI uses its off-balance-sheet activities to hedge its on-balance-sheet activities.
C)The FI believes that interest rates will decrease and made a mistake in setting its gap for off-balance-sheet activities.
D)The FI believes that interest rates will decrease and made a mistake in setting its gap for on-balance-sheet activities.

Question

Quizplus · Accepted Answer

A negative on-balance-sheet gap indicates that the FI has more liabilities than assets that will reprice in the near term, exposing it to interest rate risk. However, a positive off-balance-sheet gap indicates that the FI has more off-balance-sheet transactions, such as interest rate derivatives or loan commitments, that will generate income if interest rates change. In this case, the FI may have used its off-balance-sheet activities to hedge its on-balance-sheet interest rate risk.

How Do You Interpret the Position of an FI with a Negative