Financial institutions in swap transactions are frequently in a hedged position, meaning that the financial institution both pays and receives both floating and fixed interest rates. Can a financial institution make any money in this position?
A) No, the hedging matches cash inflows and outflows
B) Yes, because most financial institutions buy Libor deposits at a cheaper, wholesale rate
C) No, the financial institution just hedges to protect against loss
D) Yes, the financial institution can charge arrangement fees and can "skim," or pay less to one counterparty than it collects from the other
E) None of the above

Question

Quizplus · Accepted Answer

The financial institution can charge arrangement fees and can "skim," or pay less to one counterparty than it collects from the other.

Financial Institutions in Swap Transactions Are Frequently in a Hedged