1) A bank could increase asset sensitivity if gap is negative by: 2) A bank coul

Question

1) A bank could increase asset sensitivity if gap is negative by:

2) A bank could reduce the magnitude of its negative gap (make it closer to zero) by:

3) Problems with GAP include which of the following?

4) Examples of embedded options included in bank assets and liabilities include which of the following?

A) decreasing its long-term securities as a percentage of total assets B) lengthening the average maturity of its loans C) replacing variable rate loans with fixed rate loans D) all of the above E) none of the above

Explanation / Answer

1. Replacing variable rate loans with fixed rate loans

2. Decreasing its short term deposit funding as percentage of total assets

3. GAP assumes that rates on individual assets will move in unison with market interest rates

4. Call option on bonds

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