If Second Bank has more rate-sensitive assets than rate sensitive liabilities, it can reduce interest rate risk with a swap which requires Second Bank to ________.
A) pay a fixed rate while receiving a floating rate
B) receive a fixed rate while paying a floating rate
C) both receive and pay a fixed rate
D) both receive and pay a floating rate

Question

Quizplus · Accepted Answer

Second Bank can reduce interest rate risk by entering into a receive-fixed, pay-floating (or pay-floating, receive-fixed) interest rate swap. This allows it to effectively swap its rate-sensitive assets for rate-sensitive liabilities, reducing its exposure to changes in interest rates. Since Second Bank has more rate-sensitive assets than liabilities, it would enter into the receive-fixed, pay-floating swap to receive a fixed rate on its assets while paying a floating rate on its liabilities.

If Second Bank Has More Rate-Sensitive Assets Than Rate Sensitive