XYZ National Bank is one of the largest banks in the country. The bank has a significant amount of short-term debt with maturities less than one year. For example, at the end of 2022, the proportion of debt within 1 year is more than 50% of its assets. The bank is therefore subject to large interest rate risk. Please explain how could the interest rate swap help the bank to hedge its interest rate risk? Please discuss two alternative methods that XYZ National Bank can use to manage its interest rate risk.
Monetary Policy and Interest Rate
Monetary policy refers to the policy which is enforced by the central bank of the country to control the money supply and economic development of the country. The main aim of monetary policy is to manage inflation, consumption, and growth of the economy. The central bank influences interest rates to manage the money supply. In monetary policy, the central bank may revise the interest rate to increase and decrease the flow of money.
Development of the US Monetary System
The monetary system of a country refers to the system in which a government provides money in the economy of the country. In the modern-day monetary system, usually it contains the National Treasury, the mint where the notes are being printed. The Central bank and the commercial banks regulate the money supply in the economy of a country.
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