A commercial bank has $ 200 million of floating-rate loans yielding the T-bill rate plus 2 percent.
Question:
a. Discuss the type of interest rate risk each FI faces.
b. Propose a swap that would result in each FI having the same type of assets and liabilities (i. e., one has fixed assets and fixed liabilities, and the other has assets and liabilities all tied to some floating rate).
c. Show that this swap would be acceptable to both parties.
d. What are some practical difficulties in arranging this swap?
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Step by Step Answer:
a The commercial bank is at risk for a drop in rates that would lower interest income ...View the full answer
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Related Book For 
Financial Markets and Institutions
ISBN: 978-0077861667
6th edition
Authors: Anthony Saunders, Marcia Cornett
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