A Banker Who Is Paying a Fixed 6% Rate on CDs

question 8

Multiple Choice

A banker who is paying a fixed 6% rate on CDs for the next two years, and is afraid interest rates may go down on new loans, may hedge this exposure with interest rate swaps by:

• A)swapping a fixed rate for a variable rate.
• B)swapping a variable rate for a fixed rate.
• C)swapping short-term exposure for long-term exposure.
• D)swapping long-term exposure for short-term exposure.

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Definitions:

Covariance

A measure that indicates the extent to which two variables change together; positive covariance indicates that both variables tend to move in the same direction.

Conditional Probabilities

The probability of a specific event happening after another event has already taken place.

IUPAC

The International Union of Pure and Applied Chemistry, an organization that sets standards for naming chemical compounds.

Compound

A mixture resulting from the chemical combination of two or more elements in exact proportions.