Say you are a bank that receives Fed Funds + 300 from loans and pays out 100bps on deposits.

1. What is the banks net cash flow?

2. Does the bank have interest rate risk?

Consider a company that receives 6% on its investments but pays Fed Funds + 300 on its loans.

1. What is the companys net cash flow?

2. Does the company have interest rate risk?

3. What if there is a dealer that offers to:

Pay Fed Funds to receive 150bps

OR

Pay 145bps and receive Fed Funds.

What should the bank in #31 do to hedge its interest rate risk?

What would be the banks resulting net cash flow?

What should the company in #32 do to hedge its interest rate risk?

What would be the companys resulting net cash flow?

Given your responses above to b & d, and assuming it is the same dealer involved in both deals, what would be the dealers net cash flow?