An existing swap can be effectively hedged against interest rate risk by
A)selling out to another party.
B)entering into another swap agreement that is the mirror image of the original swap.
C)setting interest sensitive assets equal to interest sensitive liabilities.
D)setting asset duration equal to liability duration.

Question

Quizplus · Accepted Answer

Entering into another swap agreement that is the mirror image of the original swap, also known as an offsetting swap, is the best choice to effectively hedge against interest rate risk. This involves entering into a new swap with the opposite position, meaning that the party will receive payments when they were making payments in the original swap and vice versa. This offsets the risk of the original swap, effectively hedging it. Options A, C, and D are not relevant to hedging an existing swap against interest rate risk.

An Existing Swap Can Be Effectively Hedged Against Interest Rate