Consider a bank that is currently lending $25 million at an interest rate of six month LIBOR plus 65 basis points The loan maturity is two years and calls for semiannual payments The bank expects interest rates to fall and wishes to hedge against this by entering into an interest rate swap A dealer...

Because the risk exposure faced by the bank is a decline in interest rates the bank should ente ...

Consider a bank that is currently lending $25 million at an interest rate of six-month LIBOR plus

Question:

Consider a bank that is currently lending $25 million at an interest rate of six-month LIBOR plus 65 basis points. The loan is two years and calls for semiannual payments. The bank expects interest rates to fall and wishes to hedge against this by entering into an interest rate swap. A provides the following quotes on swaps:
a. The bank will pay a fixed rate of 5.05 percent and receive six-month LIBOR
b. The bank will receive a fixed payment of 5.25 percent and pay a floating rate of LIBOR plus 25 basis points.
Indicate which swap the bank should choose. How might the swap hedge the bank against a decline in interest rates? Assume that all payments are semiannual and made on the basis of 180/360.
Dealer
A dealer in the securities market is an individual or firm who stands ready and willing to buy a security for its own account (at its bid price) or sell from its own account (at its ask price). A dealer seeks to profit from the spread between the... Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest...