A bank with a positive dollar gap could reduce its interest rate risk by receiving fixed and paying floating in an interest rate swap.

Question

Quizplus · Accepted Answer

A bank with a positive dollar gap (meaning it has more rate-sensitive assets than liabilities) is exposed to the risk of falling interest rates. By entering into an interest rate swap where it receives fixed payments and pays floating, the bank can hedge against this risk, as the fixed payments it receives will become more valuable if interest rates fall, offsetting the reduced income from its assets.

A Bank with a Positive Dollar Gap Could Reduce Its