Question: A bank that hedges with financial futures cannot completely eliminate
A bank that hedges with financial futures cannot completely eliminate interest rate risk. Explain what basis risk is and why it exists. Is it ever possible to eliminate basis risk?
Answer to relevant QuestionsThe typical low balance customer at your bank with an average monthly demand deposit balance under $ 175 exhibits the following monthly activity: 35 withdrawals (11 electronic), two transit checks deposited, one transit ...In many cases, banks do not permit depositors to spend the proceeds of a deposit until several days have elapsed. What risks do banks face in the check clearing process? Does this justify holds on checks? What can a bank do to increase its core deposits? What are the costs and benefits of such efforts? Generally, how might management estimate the relative interest elasticity of various deposit liabilities of a bank? What are the consequences of a bank mistakenly pricing loans based on the historical cost of funds? Do they differ in a rising rate environment versus a falling rate environment? Liquidity planning requires monitoring deposit outflows. In each of the following situations, which of the outflows are discretionary and which are not? If the outflow is not discretionary, is it predictable or unexpected? ...
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