A U.S. bank has 10,000,000 deposit liabilities denominated in Euros () that must be repaid in two years. The deposits pay a fixed interest rate of 4%. The bank took the money raised and converted it to US dollars at the prevailing spot rate of $1.5/, and made a dollar-denominated loan to a corporate customer who will repay the bank over the next two years in US dollars at a variable rate of interest equal to LIBOR +3%. The interest rate earned may change every six months.

Which of the following SWAP contracts could bank management use to reduce the banks interest rate and foreign exchange rate exposure?

Multiple Choice

• The US bank could enter into a SWAP agreement to pay fixed rate in s at 3% in exchange for receiving payments in US$ based on LIBOR+3%.

• The US bank could enter into a SWAP agreement to make US$-denominated payments at LIBOR+2% in exchange for receiving -denominated payments at 4%.

• The US bank could enter into a SWAP agreement to make -denominated payments of LIBOR+2% in exchange for receiving US$-denominated payments at 4%.

• None of the above.