The manager of a savings and loan association is considering the use of a swap as part of its asset/liability strategy. The swap would be used to convert the payments of its portfolio of fixed-rate residential mortgage loans into a floating payment.
Answer the below questions.
(a) What is the risk with using a plain vanilla or generic interest-rate swap?
(b) Why might a manager consider using an interest-rate swap in which the notional principal amount declines over time?
(c) Why might a manager consider buying a swaption?