tion) The liquidity index of a portfolio is 60%. Which portfolio has a higher li

Question

tion) The liquidity index of a portfolio is 60%. Which portfolio has a higher liquidity risk in fire sales? government bond portfolio is 90%, and the liquidity index of an equity A. Government bond portfolio quity portfoliond A bank wishing to avoid lower interest income interest rate risk. on loans would be most likely to to hedge A. Buy call options B. Buy put options Based year, what should a bank do? on the repricing (or funding gap) model, when interest rate is forecasted to rise in about a A. Make the gap positive and large. (This is a risky and speculative approach because the forecast can be wrong.) B. Make the gap zero. (This is an immunization approach.) A retail bank with a traditional business model (i.e. borrowing short and lending long) tends to have leverage-adjusted duration gap. A. Positive B. Negative (10) To hedge interest rate risk for financial institutions, we can use forwards, futures, or options; but we cannot use swaps because there are no interest rate swaps available. The state A. True B. False

Explanation / Answer

6(B) Equity portfolio as it has 60% liquidity whereas government bond has 90% liquidity

7(B) Buy put option is correct, because call option is purchase when there is estimation of increase.

8(B) Make the Gap Zero

9(B) Negative as it has shortage of fund since lending is long.

10(B) False is correct, as interest swap is also available

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