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Question
The following information is about current spot rates for Second Duration Savings' assets (loans) and liabilities (CDs). All interest rates are fixed and paid annually.
What is the interest rate risk exposure of the optimal transaction in the previous question over the next 2 years?
A. The risk that interest rates will rise since the FI must purchase a 2-year CD in one year.
B. The risk that interest rates will rise since the FI must sell a 1-year CD in one year.
C. The risk that interest rates will fall since the FI must sell a 2-year loan in one year.
D. The risk that interest rates will fall since the FI must buy a 1-year loan in one year.
E. There is no interest rate risk exposure.
Answer
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