1.A regional bank has $200 million of floating-rate loans yielding the BBR rate plus 2 per cent. These loans are financed by $200 million of fixed-rate deposits costing 9 per cent. A savings bank has $200 million of mortgages with a fixed rate of 13 per cent. They are financed by $200 million of CDs with a variable rate of the BBR rate plus 3 per cent.

Discuss the type of interest rate risk each FI faces.

One possible swap that would help both banks is the following:

The regional bank sends variable-rate payments of the BBR rate + 1 per cent (T + 1%) to the savings bank and receives fixed-rate payments of 9 per cent from the savings bank. Show that this swap would be acceptable to both parties.

What are some of the practical difficulties in arranging this swap? LO 7.7