Answered step by step
Verified Expert Solution
Link Copied!

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

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_step_2

Step: 3

blur-text-image_step3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

The Changing Geography Of Banking And Finance

Authors: Pietro Alessandrini ,Michele Fratianni ,Alberto Zazzaro

1st Edition

ISBN: 1441947205, 978-1441947208

More Books

Students also viewed these Finance questions