Question: Consider the same simple setting used in the TRS setting. Bank A, a highly rated bank, has a funding cost of Libor (L) rate, while

Consider the same simple setting used in the TRS setting. Bank A, a highly rated bank, has a funding cost of Libor (L) rate, while Bank B, a lower rated entity, has a funding cost of L + 40 basis points. Bank A has on its books an obligation currently yielding L + 60 basis points. Bank B wants exposure to the credit risk of that obligation. Why and how should Bank B employ TRS and benefit from it? Why and how could Bank A benefit from the TRS contract?

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In this scenario Bank B wants exposure to the credit risk of an obligation held by Bank A To achieve this Bank B can employ a Total Return Swap TRS co... View full answer

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