derivatives (an instrument or contract that derives its value from another underlying asset, instrument, or contract) when used prudently can represent a cost-effective means to manage risk. Banks can replicate on-balance sheet transactions with off-balance sheet contracts.

-The most common interest rate derivatives are:

-Interest rate swaps, caps, and floors.

-Financial futures contracts

-Credit default swaps.

Tell how you might use a derivative to reduce the risk that is faced by the Bank. I would like a good explanation of the derivative that you plan to use and how it will work to solve your banks problem.

A survey of First International Bank & Trust corporate loan customers this month (September) indicates that on balance, these loan customers will need to draw $170 million more than the banks management has forecasted and is prepared for to happen. The banks economist has predicted a significant increase in money market rates over the next sixty days. How can the bank solve the problem using derivatives to solve the problem of derivatives? How would the bank solve the liquidity problem?