A commercial bank recognizes that its net income suffers whenever interest rates

Question

A commercial bank recognizes that its net income suffers whenever interest rates increase. Which of the following strategies would protect the bank against rising interest rates?


a)Buying inverse floaters.

b)Entering into an interest rate swap where the bank receives a fixed payment stream, and in return agrees to make payments that float with market interest rates.

c)Purchase principal only (PO) strips that decline in value whenever interest rates rise.

d)Enter into a short hedge where the bank agrees to sell interest rate futures.

e)Sell some of the bank's floating-rate loans and use the proceeds to make fixed-rate loans.

Explanation / Answer

c)Purchase principal only (PO) strips that decline in value whenever interest rates rise.

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