Compare the strengths and weaknesses of GAP and earnings sensitivity analysis with DGAP and EVE sensitivity analysis.
Answer to relevant QuestionsIs the following statement generally true or false? Provide your reasoning. “A bank with a negative GAP through three years will have a positive DGAP.” What are the risks in a FRA if you are the buyer? Your firm just made a three year, fixed rate loan at 6.25 percent. You would like to convert this to a floating rate loan that is priced based on three month LIBOR as the base rate. Explain how you could use a basic interest ...Your bank is asset sensitive, and management wants to protect against loss from interest rate changes. a. Would an interest rate cap or floor serve as a better hedge? Explain. b. Would a collar or reverse collar serve as a ...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?
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