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

See similar textbooks

Related questions

Q: Which of the following statements is incorrect? a. when market rates are changing, the discount rate…

A: b. money market interest rates tend to respond quickly to Federal Reserve open market operations:…

Q: Companies often use derivatives to reduce the risk of adverse changes in all of the following…

A: Risk Management -Risk management includes identifying, analyzing, and responding to various risk…

Q: nterest rate swaps and gap analysis to manage interest rate risk.

A: There are two methods in which a bank can manage its interest rate risk (a) by matching the…

Q: A firm gives all its employees American-style call options on the firm's stock. The options have a…

A: Hello. Since your question has multiple parts, we will solve first question for you. If you want…

Q: Please explain why this statement is (False). Ignoring default risk, if a bond's expected return…

A: The expected return is the return from an investment that the market expects based on the bond's…

Q: The following statements relate to derivatives. Which of the following is FALSE? a. Swaps may have…

A: Options are contingent claims, while swaps and future contract are forward commitments. This implies…

Q: Loans Loan Expected Standard Amount Return Deviation A $ 15 8.1% 1.1% million В $ 15 9.2% 1.3%…

A: The following solution is given below:

Q: Banks can hedge the credit risk of their mortgage loans by buying credit default swaps. (Think about…

A: The risk or uncertainty that is present in an investment transaction that the investee will not…

Q: By acting as the counterparty to every futures position, the exchange eliminates the A) market B)…

A: The correct answer to the question is "B) credit".Credit risk is the risk that there will be a…

Q: If a bank manager wants to protect the bank against losses that would be incurred on its portfolio…

A: If a bank manager wants to protect the bank against losses that would be incurred on its portfolio…

Q: If a bank acts as a market maker between two counterparties in swaps transactions (earning a…

A: SWAP transaction means an agreement between two parties in which both the parties agree to exchange…

Q: Imagine that the table above outlines deposits rates. Assuming A wants a fixed rate deposit and B…

A: There are two companies A wants a fixed rate deposit and B wants floating rate deposit, comparative…

Q: Which one of the following statements is correct for an interest rate swap? A. There is an exchange…

A: interest rate swap is the exchange of future interest payment with other type od future interest…

Q: What is a swap? Describe the mechanics of a fixed-rate swap and a floating-rateswap.

A: SwapsAn agreement amongst 2 counterparties i.e parties, a financial institution for the exchange of…

Q: Which of the following is the advantage of swaps? Answer choices: a. Early termination of swaps…

A: Swap means a contract of exchanging one financial instrument with another between the parties…

Q: Answer the below questions. (a) For a single-name credit default swap, what is the difference…

A: A Credit Default Swap (CDS) is a financial contract between two parties where one party (the buyer…

Q: Typically, short-term interest rates: А. are more volatile than long-term interest rates В. are less…

A: Short-term interest rates are usually averages of daily rates, calculated as a percentage. The…

Q: The following is NOT a characteristic feature of a plain vanilla interest rate swap: exchange of…

A: Answer

Q: When borrowers tend to pay back the loans to bankers earlier, the bank is facing a. Repricing risk O…

A: Since, more than one different questions are posted, answer for the first question is only provided…

Q: Why might a company become involved in an interestrate swap contract to receive fixed interest…

A: Interest rate swap contract: It is an agreement between the two parties who are in contract, where…

Q: What kind of futures hedge would be appropriate in each of the following situations? a. A bank…

A: It represents a derivative contract where one party agrees to purchase or sell the asset at a price…

Q: The fact that the clearinghouse is the counterparty to every futures contract issued is important…

A: Risk is the uncertainty or potential loss in an investment decision.

Concept explainers

Swaps

A swap is a derivative contract in which two parties are agreed to exchange their cash flows from two different financial instruments for a defined period. In swap contracts, cash flows from one financial instrument are fixed and cash flow from other financial instruments is variable based on the interest rate, exchange rate, and commodity price. Swap contracts are transacted in an over-the-counter system. Swap contracts are utilized to hedge risk and mitigate loss.

Question

41. After conducting a rate-sensitive analysis, a bank finds itself with the following
amounts of rate-sensitive assets and liabilities (RSAS and RSL) and fixed-rate assets
and liabilities (FRAs and FRLs); the rate of return and cost rates on the accounts are
also given:
Assets
RSAS @ 4.25%
FRAS @ 5.15%
NEA
Total
Amount
(Million $)
S 322
S 700
S 120
$1,142
Liabilities
& Equity
RSLS @ 3.11%
FRLS @ 4.95%
Equity
Total
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.
Amount
(Million $)
S 200
$ 800
S 142
$1,142
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.

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

Trending now

This is a popular solution!

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

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
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.
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.
How can a company offset risk using interest rate swaps?
Not all credit risk can be removed with a credit default swap because counterparty risk still exists interest rate risk still exists swaps are not traded on an exchange all of the above
Interest Rate Swap: A company that expects interest rates to rise and wishes to exchange its floating interest rate for a fixed rate would: Select one OA. Enter into a payer swap B. Enter into a receiver swap C. Sell interest rate futures OD. Buy interest rate futures
a)explain how to price a currency swap if either set of payments is at a floating rate. b)explain how a currency swap can be used to convert a loan in one currency into a loan in another currency, and provide some reasons for doing so. c)demonstrate that a currency swap contract is equivalent to a series of forward contracts. d)explain how a currency swap can be used to hedge a stream of foreign cash flows. e)define interest rate derivatives, and compare and contrast them against bond derivatives.
Assume you are lending money to company X. A credit default swap (CDS) consists of an agreement by a third party to pay the lost principal and interest of a loan to you (the CDS buyer) if a borrower defaults on a loan. Which of the following is false? O A. A Swap completely solves the problem that company X might default OB. A Swap solves the default problem from Company X on the condition that the third party (CDS provider) will not default. O C. When financial crisis happens, the CDS seller may have to pay recovery to many CDS buyers, and then the CDS seller could default. O D. B and C are part of the reasons for 2008 Global financial crisis.
D3) Finance Use covered interest rate parity (CIP) to show that a fixed exchange rate and free capital flows imply that a central bank cannot set the interest rate independently from the interest rate set by the reference currency's central bank.
Merck is an example of a company who decided to mitigate the adverse impact of market fluctuations by entering into hedging agreements using: B. Interest rate swaps C. Both A & B A. Currency options D. Neither A or B
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 False

SEE MORE QUESTIONS

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

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

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

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

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS