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a) Suppose a Bank’s GAP is positive, and interest rate is expected to increase. Hence, Bank...

a) Suppose a Bank’s GAP is positive, and interest rate is expected to increase. Hence, Bank should consider interest rate hedging. justify

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A positive Gap for a bank is when the sensitive interest rate assets are greater than the sensitive interest rate liabilities. In such cases, when the rate rise, banks profit will rise but the vice versa is also true. In order to combat any ill-effects of falling interest rates, banks consider interest rate hedging. One such way could be to increase their interest sensitive liabilities to `make the gap zero.

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