Assume that American First Bank (AFB) has more rate-sensitive assets (in terms of dollars) than rate-sensitive liabilities.
: Would AFB be more likely to be adversely affected by an increase or a decrease in interest rates? Explain why. Hint: Your answer should be in terms of how AFB’s interest revenues and interest expenses will be affected given this scenario.
: Should AFB purchase or sell interest rate futures contracts in order to hedge its exposure? Explain.
: Would a long hedge be more appropriate than a short hedge for AFB? Why or why not?