QUESTION 19

A bank takes fixed-rate deposits and makes variable-rate loans. Assuming that changes in interest rate will be of the same direction and magnitude across the yield curve, what interest rate risk does the bank face, and how would the interest rate swap be used to hedge this risk?

a. The bank risks rising interest rates, hence it needs to be the swap receiver.

b. The bank risks rising interest rates, hence it needs to the swap payer.

c. The bank risks falling interest rates, hence it needs to be the swap payer.

d. The bank risks falling interest rates, hence it needs to be the swap receiver.