1 After conducting a rate-sensitive analysis, a bank finds itself with the following amounts of rate-sensitive...

 

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1 After conducting a rate-sensitive analysis, a bank finds itself with the following amounts of rate-sensitive assets and liabilities (RSAS and RSLS) and fixed-rate assets and liabilities (FRAS and FRLs). The rate of return and cost rates on the accounts are also given in the following table: Assets RSAS @ 4.25% FRAS @ 5.15% NEA Total Amount (million $) $ 322 $ 700 $ 120 $1,142 Liabilities & Equity RSLS @ 3.11% FRLS @ 4.95% Equity Total Amount (million $ 200 $ 800 $ 142 $ 1,142 Suppose the institution wishes to fully hedge the interest rate risk with a swap. A swap is available with whatever notional principal is needed that pays fixed at 4.95 percent and pays variable at LIBOR. LIBOR is currently 5.11 percent. By how much would profits change right now if the bank engages in the swap? 1 After conducting a rate-sensitive analysis, a bank finds itself with the following amounts of rate-sensitive assets and liabilities (RSAS and RSLS) and fixed-rate assets and liabilities (FRAS and FRLs). The rate of return and cost rates on the accounts are also given in the following table: Assets RSAS @ 4.25% FRAS @ 5.15% NEA Total Amount (million $) $ 322 $ 700 $ 120 $1,142 Liabilities & Equity RSLS @ 3.11% FRLS @ 4.95% Equity Total Amount (million $ 200 $ 800 $ 142 $ 1,142 Suppose the institution wishes to fully hedge the interest rate risk with a swap. A swap is available with whatever notional principal is needed that pays fixed at 4.95 percent and pays variable at LIBOR. LIBOR is currently 5.11 percent. By how much would profits change right now if the bank engages in the swap?

Answer rating: 100% (QA)

SOLUTION To fully hedge the interest rate risk the bank needs to swap its variable rate on RSAS for ... View the full answer