What Kind of Interest Rate Swap (Of Liabilities)would an FI

question 10

Multiple Choice

What kind of interest rate swap (of liabilities) would an FI with a positive funding gap utilize to hedge interest rate risk exposure?

• A)Swap floating-rate payments for fixed-rate payments.
• B)Swap floating-rate receipts for fixed-rate payments.
• C)Swap fixed-rate receipts for floating-rate receipts.
• D)Swap floating-rate receipts for fixed-rate receipts.

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Definitions:

Cash Cycle

The period between the outlay of cash for raw materials and receiving cash from customer payments, essentially measuring the time it takes for a company to turn its inventory into cash.

Compensating Balance

A minimum account balance that a borrower must maintain in a bank as a condition for obtaining a loan, often used to offset a portion of the bank's lending costs.

Interest Rate

The percentage of an amount of money charged by a lender to a borrower for the use of assets.

Effective Interest Rate

A measure of the real cost of borrowing that takes into account the effect of compounding interest in addition to the nominal rate.