41. After conducting a rate-sensitive analysis, a bank finds itself with the followingamounts of rate-sensitive assets and liabilities (RSAS and RSL) and fixed-rate assetsand liabilities (FRAs and FRLs); the rate of return and cost rates on the accounts arealso given:AssetsRSAS @ 4.25%FRAS @ 5.15%NEATotalAmount(Million $)S 322S 700S 120$1,142Liabilities& EquityRSLS @ 3.11%FRLS @ 4.95%EquityTotalIf the bank wishes to set up a swap to totally hedge the interest rate risk, the bankshouldA. pay a variable rate of interest and receive a fixed rate ofinterest.B. pay a fixed rate of interest and receive a variable rate ofinterest.Amount(Million $)S 200$ 800S 142$1,142C. pay a variable rate of interest and receive a variable rateof interest.D. pay a fixed rate of interest and receive a fixed rate ofinterest.

Let us calculate the difference between what the bank pays and receives with its existing balance…

If the bank wishes to set up a swap to totally hedge the interest rate risk, the bank should A. pay a variable rate of interest and receive a fixed rate of interest. B. pay a fixed rate of interest and receive a variable rate of interest. C. pay a variable rate of interest and receive a variable rate of interest. D. pay a fixed rate of interest and receive a fixed rate of interest.

If the bank wishes to set up a swap to totally hedge the interest rate risk, the bank should A. pay a variable rate of interest and receive a fixed rate of interest. B. pay a fixed rate of interest and receive a variable rate of interest. C. pay a variable rate of interest and receive a variable rate of interest. D. pay a fixed rate of interest and receive a fixed rate of interest.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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If a borrower with a fixed rate entered into a swap (to change his rate to floating) in an environment with an upward sloping curve, it would likely have __________ interest payments in the initial periods of the swap. -higher -lower -the same
How can a company mitigate risk using interest rate swaps?
Which of the following statements about interest rate swaps is/are true? I - The notional principals are exchanged by the counterparties at the end of an interest rate swap's life II - The differences in how credit risk is priced gives rise to comparative advantage in borrowing through swaps. III - When an intermediary is involved in a swap, the intermediary assumes no counterparty risk for either end of the transaction IV - It is possible for both counterparties to benefit from a swap even if one counterparty has the absolute advantage in all types of borrowing O a. I, II, III, and IV O b. II and IV O c. II, III, and IV O d. I, II, and IV Oe. II and III
Which of the following is NOT true in swap market participation by the commercial bank? a. Commercial bank engaged in swaps to reduce interest rate risk. b. Serve as an intermediary by matching up to two parties in a swap. c. Serve as an investment bank by taking the counterparty position to accommodate a party that desires to engage in a swap. d. Engaged in swap to serve as a dealer that desires to engage in a swap
Financial Risk Management Differentiate between Credit Default Swap (CDS) and Total Return Swap (TRS).
All of the following are credit derivatives except: Group of answer choices C. Spread options D. Credit-linked notes B. Credit default swaps (CDS) A. Remics
A swap: Group of answer choices B. Gives the holder the right to see the underlying bond. A. Allows the buyer to purchase the underlying instrument. C. Is an OTC agreement to exchange the cash flows of two different securities. D. Not effective at managing interest rate risks.
Who regulates credit default swaps? Please explain in your own words.
A bank seeding to avoid lower than expected yields from loans and security investments is most likely to use: OA short position or selling hedge in futures. O Along position or buying hedge in futures. O Along position in put option on futures contracts. OA long position or buying hedge in futures and a long position in put option on futures contracts. O None of the options are correct. D
Exchange rate risk is irrelevant because investors can hedge exchange rate risk on their own. Comment on this preposition.
Which of the following statement is (are) TRUE of collateralized loan obligation (CLO)? A: A CLO pools a group of loans and creates multiple tranches with different levels of risk B: The less risky tranches in a CLO have a lower pay-off (i.e. lower coupons) C: A tranch of a CLO can have a high credit rating even though the underlying loans in a CLO are risky D: All of the Above Please answer fast i give you upvote.
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.

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