An interest rate swap can effectively be hedged against interest rate risk by:
A) selling out to another party.
B) entering into another swap agreement that has the opposite transactions to the first swap.
C) setting floating-rate obligations equal to fixed-rate obligations.
D) matching durations of assets and liabilities.

Question

Quizplus · Accepted Answer

Entering into another swap agreement with opposite transactions can effectively hedge against any interest rate risk. It involves creating a new swap with the opposite positions of the previous swap, such that any gains or losses made on one swap are offset by the other swap. This helps to reduce the overall interest rate risk. The other options mentioned do not effectively hedge against interest rate risk in the case of an interest rate swap.

An Interest Rate Swap Can Effectively Be Hedged Against Interest