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Suppose a bank wants to minimize the interest rate risk of a $100 million position in fixedrate mortgages paying 5%. To do so, it can
Suppose a bank wants to minimize the interest rate risk of a $100 million position in fixedrate mortgages paying 5%. To do so, it can receive LIBOR + 3% from a counterparty.
a) If the annual LIBOR rate is 0.5%, what is the banks net position on this transaction after 3 months?
b) If the LIBOR rate is 3%, what is the banks net position on this transaction after 3 months?
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