In a swap arrangement, the variable rate swap cash flow streams often do not fully hedge the variable rate cash flow streams from the balance sheet due to basis risk a What are the possible sources of basis risk in an interest rate swap b How could the failure to achieve a perfect hedge be realized...

a First the variablerate index on the liabilities in the cash market may not match perfectly ...

In a swap arrangement, the variable-rate swap cash flow streams often do not fully hedge the variable-rate

Question:

In a swap arrangement, the variable-rate swap cash flow streams often do not fully hedge the variable-rate cash flow streams from the due to basis risk.
a. What are the possible sources of basis risk in an interest rate swap?
b. How could the failure to achieve a perfect hedge be realized by the swap buyer?
c. How could the failure to achieve a perfect hedge be realized by the swap seller? Balance Sheet
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial...