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

Question

Quizplus · Accepted Answer

An FI with a positive funding gap has more liabilities than assets, which means that it will benefit from lower interest rates since it will have to pay less interest on its liabilities. To hedge against the risk of rising interest rates, the FI can swap in floating-rate payments for fixed-rate payments with a counterparty. This will allow the FI to lock in a fixed interest rate and protect against the risk of rising rates.

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