What kind of interest rate swap (of liabilities)would an FI with a positive funding gap utilize to hedge interest rate risk exposure?
A)Swap floating-rate payments for fixed-rate payments.
B)Swap floating-rate receipts for fixed-rate payments.
C)Swap fixed-rate receipts for floating-rate receipts.
D)Swap floating-rate receipts for fixed-rate receipts.

Question

Quizplus · Accepted Answer

If an FI has a positive funding gap, it means that it has more liabilities that are exposed to interest rate risk than assets. Therefore, it is prudent for the FI to hedge the risk by exchanging its floating-rate liability payments for fixed-rate liability payments through an interest rate swap. This will provide certainty of interest payments and reduce the adverse impact of rising interest rates on its net interest margin. Swapping floating-rate receipts for fixed-rate payments (choice B) or swapping fixed-rate receipts for floating-rate receipts (choice C) would not address the FI's liability exposure to interest rate risk. Swapping floating-rate receipts for fixed-rate receipts (choice D) would be suitable if the FI had a negative funding gap, meaning it has more interest rate-sensitive assets than liabilities.

What Kind of Interest Rate Swap (Of Liabilities)would an FI