Explain How a Long Hedge Could Be Used to Protect

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The Answer is A long hedge could be used by a bank to protect itself from the risk of rising interest rates before a loan is funded. In this scenario, the bank would enter into a long hedge position by buying interest rate futures contracts. By doing so, the bank would lock in a predetermined interest rate for a future date, effectively protecting itself from potential interest rate increases.

For example, let's say a bank plans to lend money at a fixed interest rate in six months' time. To protect itself from the risk of rising interest rates, the bank could enter into a long hedge by buying interest rate futures contracts that expire in six months. If interest rates were to rise during this period, the value of the futures contracts would increase, offsetting the higher cost of funding the loan.

By using a long hedge, the bank can mitigate the risk of rising interest rates and ensure that it can fund the loan at the predetermined rate, thus protecting its profit margins and financial stability.

Explain How a Long Hedge Could Be Used to Protect

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Explain How a Long Hedge Could Be Used to Protect

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Correct Answer:
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