Discuss the role of a third party intermediary in an interest rate swap agreement. Describe the risks assumed by the intermediary. How does the intermediary potentially profit from this activity?
Answer to relevant QuestionsWhat features of interest rate swaps make them more or less attractive than financial futures as a risk management tool? Your bank is looking for the lowest cost two year, fixed rate financing. It has decided to issue four consecutive three month Eurodollar time deposits on balance sheet and hedge the future borrowing costs by taking positions ...Suppose that you buy an interest rate cap on three month LIBOR with a two year maturity and simultaneously sell a floor on three month LIBOR with a two year maturity. Ignore the premiums. Draw a profit diagram that indicates ...A bank that hedges with financial futures cannot completely eliminate interest rate risk. Explain what basis risk is and why it exists. Is it ever possible to eliminate basis risk? Explain how each of the following will affect a bank’s deposit balances at the Federal Reserve: a. The bank ships excess vault cash to the Federal Reserve. b. The bank buys U. S. government securities in the open market. ...
Post your question