A swap can be effectively hedged against interest-rate risk by:
A) Selling out to another party
B) Entering into another swap agreement that is the mirror image of the first swap
C) Setting interest-sensitive assets equal to interest-sensitive liabilities
D) Setting asset duration equal to liability duration
E) None of the above

Question

Quizplus · Accepted Answer

Entering into another swap agreement that is the mirror image of the first swap effectively offsets the interest-rate risk of the original swap, as the cash flows from the second swap will counterbalance those of the first.

A Swap Can Be Effectively Hedged Against Interest-Rate Risk By