Explain how the outcome from using a basic interest rate swap to hedge borrowing costs will generally differ from using an interest rate cap and an interest rate collar as hedges. Why is there a difference?
Answer to relevant QuestionsIn each of the following cases, indicate whether an interest rate cap, floor, collar, or reverse collar is an appropriate position for a hedge. Recommend a specific position. a. A bank loan customer wants to borrow at a ...Are there margin requirements for the following positions? Explain why or why not. a. Buy an interest rate cap b. Sell a put option on Eurodollar futures c. Sell an interest rate floor d. Sell a Eurodollar futures ...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? What do the terms core deposits and volatile, or noncore, deposits mean? Explain how a bank might estimate the magnitude of each. Assume the following transactions occur sequentially: a. The DMV Corporation, based in New Orleans, converts a $ 3 million demand deposit held at the New York Money Center Bank to a $ 3 million Eurodollar deposit held at ...
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