1. Your company is speculating that the interest rate is taking an unfavorable turn. What should a Financial Institution do to hedge against this situation?

(see textbook section 15-1a).

2. How effective do you think credit default swaps are for making mortgage markets more stable? Why it is sometimes criticized for making the credit crisis worse?

(see textbook section 15-7f).

3. Miami Mutual Bank purchases a two-year interest rate cap for a fee of 3 percent of notional principal valued at $20 million, with an interest rate ceiling of 11 percent and LIBOR as the index representing the market interest rate. At the same time, Miami Mutual sells a two-year floor (8 percent) for a fee of 2 percent of the $20 million principal. Assume that LIBOR is expected to be 7 percent and 14 percent at the end of each of the next two years, respectively. What is this type of strategy called? Also what dollar amount do Miami Mutual Bank stand to gain or lose from this strategy?