A Eurozone-based bank that is liability-sensitive to market interest rate changes might reduce interest rate risk by:
A) entering into a pay fixed I receive variable standard interest rate swap
B) entering into a receive fixed I pay variable amortizing interest rate swap
C) entering into a EUR/USD FX swap
D) entering into a receive fixed I pay variable standard interest rate swap

Question

Quizplus · Accepted Answer

By entering into a pay fixed, receive variable interest rate swap, the bank can hedge against rising interest rates, which would increase the cost of its liabilities. This swap allows the bank to pay a fixed rate while receiving a variable rate, thus reducing its exposure to interest rate increases.

A Eurozone-Based Bank That Is Liability-Sensitive to Market Interest Rate