Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Bank of America enters into a 3-year plain vanilla SWAP contract with AllState Insurance. The notional value of the contract is $100 million. Bank of
Bank of America enters into a 3-year plain vanilla SWAP contract with AllState Insurance. The notional value of the contract is $100 million. Bank of America agrees to pay a fixed rate of interest of 3%, while AllState will pay LIBOR+1%. Which of the following statements is correct?
A. Bank of America is likely to have a positive duration gap.
B. AllState must be hegding its exposure to an increase in interest rates.
C. By entering the SWAP, Bank of America is hedging risk of a decline in interest rates.
D. None of the above.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started