If a bank is found to have a positive duration gap and interest rates are expect

Question

If a bank is found to have a positive duration gap and interest rates are expected to ________, it _______ hedge its interest rate risk exposure.

A-rise, should

B-rise, should not

C-fall, should not

D-both A and C are correct

All but which of the following is a reason for negative stock price reaction at the announcement of a Seasoned Equity Offering?

-mechanical dilution of per share value

-signaling of overcapitalization

-signaling of overvalued equity prices

-signaling of poor prospective investments

Explanation / Answer

A positive duration gap means that the bank's assets have a weighted duration greater than that of the bank's liabilities. Hence, the asset value is more interest rate sensitive than the liability value. If interest rates fall the assets would lose more value than the liabilities, thereby eroding equity value. Therefore, the bank should hedge against interest rate risk exposure in such a case. If interest rates fall. assets gain more value as compared to liabilities, thereby elevating equity value. in such a scenario it does not make sense to hedge against interest rate exposure.

Hence, the correct option is (D).

NOTE: Please raise a separate query for the solution to the remaining question.

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