he gap refers to the gap between the assets and liabilities of the bank. The interest rate gap, for given period, measures the bank's exposure to interest rate risk for that period. A negative gap ccurs when for that period, the bank's interest rate sensitive liabilities exceed its interest rate ensitive assets. A negative gap means that when rates rise, the bank's profits will fall. A ositive gap occurs when for that period, interest rate sensitive assets exceed its interest rate ensitive liabilities. A positive gap means that when rates rise, the bank's profits will rise. - You are the treasurer of Banco Federal above. The bank has arranged financing for the loan above for the entire year at a fixed interest rate. That is, the entire cost of financing the loan for one year is fixed, and will not change with changes in interest rates. In January, when your bank provided the loan above interest rates were high. However, interest rates have started to fall, and, in March, you become concerned about a decrease in interest income from the loan. Again, the Ioan rate from July 1 st until December 31 st will be determined on July 1 st at the spot 3-month CD rate. Assume that all the data above (including the regressions) remain the same. Design the optimal hedge for the BANK and explain. - Suppose that the bank has arranged the financing for the loan above and the terms of the loan in a way that they exactly match each other. That is: - The financing interest rate and the loan interest rate for the first 6 months are known. - The financing interest rate and the loan interest rate for the six-month period from July 1 st until December 31 st will BOTH be determined on July 1st. at the spot 6-month CD rate. What is the optimal hedge for the bank? Explain