You manage a bank that receives SOFR +300 from loans and pays out 125bps on deposits.

I manage an insurance company that offers a contract that pays SOFR +350. It finances itself through investments that earn 5.5%.

Fair Staihr Swap Dealer offers swaps that EITHER (1) pay SOFR and receive 50bps OR (2) pay 43bps and receive SOFR.

A. What should your bank do to hedge its interest rate risk? Be specific.

B. What would be your banks resulting net cash flow from its ordinary business combined with your suggested hedge from part a? Show your work to receive full credit.

C. What should my insurance company do to manage its interest rate risk? Be specific.

D. What would be your banks resulting net cash flow from its ordinary business combined with your suggested hedge from part a? Show your work to receive full credit.

E. Given your responses above, what would be Fair Staihrs net cash flow? Show your work to receive full credit.