a. Boca asks you to assess its exposure to interest rate risk. Describe how Boca will be affected by rising interest rates and by a decline in interest rates.
b. Given the information about the yield curve, would you advise Boca to hedge its exposure to interest rate risk? Explain.
c. Explain why your advice to Boca may possibly backfire.
As a consultant to Boca Savings & Loan Association, you notice that a large portion of 15-year, fixed-rate mortgages are financed with funds from short-term deposits. You believe the yield curve is useful in indicating the market's anticipation of future interest rates and that the yield curve is primarily determined by interest rate expectations. At the present time, Boca has not hedged its interest rate risk. Assume that a steep upward-sloping yield curve currently exists.