A bank pays a floating rate of interest on deposits (i.e. liabilities) and earns a fixed rate of interest on loans (i.e. assets). This mismatch between assets and liabilities can cause tremendous difficulties. Explain what type of a swap this bank could use and why?
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A bank pays a floating rate of interest on deposits (i.e. liabilities) and earns a fixed rate of interest on loans (i.e. assets). This mismatch between assets and liabilities can cause tremendous difficulties.
Explain what type of a swap this bank could use and why?
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- A bank finds that its assets are not matched with its liabilities. It is taking floating rate deposits and making fixed-rate loans. Come up with a numerical example that shows how the swap offsets the risk.A bank has a positive repricing gap. This implies that a. some RSAs are financed by fixed-rate liabilities. b. some RSLs are financing fixed-rate assets. c. some RSAs are financing equity. d. the bank has no fixed-rate assets.Question 1e A bank finds that its assets are not matched with its liabilities. It is taking floating-rate deposits and making fixed-rate loans. How can swaps be used to offset the risk?
- What risks might commercial banks face if they use short-term deposits from savers to pay for long-term loans, like mortgages, that often have fixed interest rates? What could the financial institution do to lower these risks?A deposit institution can offset its liquidity risk to reduce its net deposit drains by reducing its assets through all of the following methods except: a. Borrowing funds or issuing equity. b. Calling back its loans. c. Use cash reserve. d. Selling securities.What is the asset-liability time mismatch that all banks face?
- Say you are a bank and want to reduce the duration of your assets. One way of doing so would be to use an interest rate swap to change the payments you receive from fixed to floating rate. Question 1 options: True FalseWhat kind of interest rate swap would a commercial bank with a negative re-pricing gap (that is, rate sensitive assets is less than rate sensitive liabilities) utilize to hedge interest rate risk exposure (that is, would the commercial bank enter into an interest rate swap to make floating rate payments and receive fixed rate payments)?What kind of interest rate swap would a commercial bank with a negative re - pricing gap (that is, rate sensitive assets is less than rate sensitive liabilities) utilize to hedge rate risk exposure (that is, would the commercial bank enter into an interest rate swap to make floating rate payments and receive fixed rate payments)? Explain
- If a bank wants to shorten its asset duration, what type of risk is the bank concerned about? Group of answer choices Off balance sheet risk. The risk of rising interest rates. The risk of falling interest rates. Foreign exchange rate risk.Banks find it necessary to accommodate their clients’ needs to buy or sell FX forward, in many instances for hedging purposes. How can the bank eliminate the currency exposure it has created for itself by accommodating a client’s forward transaction?A bank wants to implement a loan pricing model and has to look at several variables to consider. Please select the variable that is incorrectly described. a. A profit margin to provide the bank with an adequate return on capital. b. Risk premium to counter the effect of default risk. c. Cost of funding that include the cost of bonds issued. d. Operating costs that include the cost of interest paid to depositors.