A large U$.$S$.$ commercial bank has a high exposure to floating$-$rate loans while its liabilities are primiarily fixed$-$rate deposits. The bank is concerned about a prolonged period of declining interest rates and needs to hedge against potential net interest margin $($NIM$),$ compression over the next two years.

Current Balance Sheet Composition:

$-$ Assets:

$-$ $$500$ million in floating$-$rate commercial loans $($interest resets quarterly, average duration: $3$ years$).$

$-$ $$250$ million in fixed$-$rate securities $($average duration: $5$ years$).$

$-$ Liabilities:

$-$ $$600$ million in fixed$-$rate deposits $($average maturity: $3$ years$).$

$-$ $$150$ million in short$-$term borrowings $($variable rate, resets monthly$).$

$-$ The bank's net interest margin $($NIM$)$ is currently stable, but risk managers are concerned about falling interest rates over the next two years.

Market Expectations & Risk Considerations:

$-$ The Federal Reserve is expected to cut interest rates by $150$ basis points $(1\mathrm{.}50\%)$ over the next $24$ months due to economic slowdown concers.

$-$ The bank's net interest Margin $($NIM$)$ is currently stable but is expected to decline significantly if rates fall.

$-$ The bank's regulatory framework discourages speculative trading in derivatives, meaning any hedging strategy must be aligned with balance sheet risk management rather than speculative positioning.

$-$ Liquidity constraints limit the ability to sell assets or restructure loan portfolios significantly.

The bank needs to protect its NIM and stabilize earnings over the next two years by hedging the impact of falling interest rates on its floating$-$rate loan portfolio while considering liquidity constraints, regulatory restricutions, and counterparty risk. What risk management strategy should the bank utilize to hedge against the negative impact of falling interest rates while maintaining the bank's existing asset$-$liaibility structure and complying with regulatory guidelines?

A$)$ Increase floating$-$rate loans to offset the decline in interest income.

B$)$ Enter into an interest rate swap to pay fixed and receive floating.

C$)$ Short U$.$S$.$ Treasury futures to hedge against falling rates.

D$)$ Use interest rate floors to maintain a minimum loan yield.