In year one, a bank facing reinvestment risk earns 11 percent on its assets and pays 10 percent on its liabilities. In year two, the bank had a negative profit spread of 100 basis points. Which of the following is true? In year two, a. rates rose 100 basis points. b. rates rose 200 basis points. c. rates fell 100 basis points. d. rates fell 200 basis points. e. None of these options are correct.
Macrohedging
Hedging or hedge accounting is a risk-mitigation technique used to protect the current financial position from potential losses. Hedging is often confused with speculating. The major difference between the two is that hedging does not involve guessing, whereas speculation is based on guessing the direction of movement of the underlying asset to book profits.
Finance Mathematics
The area of applied mathematics known as mathematical finance, also known as quantitative finance or financial mathematics is concerned with the mathematical modeling of financial markets. The application of mathematical methods to financial problems is known as financial mathematics. A financial market is a place where people can exchange low-cost financial securities and derivatives. Stocks and bonds, raw materials, and precious metals, both of which are regarded as commodities in the stock markets, are examples of securities. It uses probability, statistics, stochastic processes, and economic theory as methods.
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