A bank with a strong positive leverage adjusted duration gap can hedge their exposure to interest rate increases by entering into
A)a currency swap agreement to receive the fixed rate payment.
B)an interest rate swap agreement to make the fixed-rate payment side of the swap.
C)a credit swap agreement to receive the floating rate payment.
D)a commodity swap agreement to make the fixed-rate payment side of the swap.
E)an equity swap agreement to make the floating-rate payment side of the swap.

Question

Quizplus · Accepted Answer

Entering into an interest rate swap agreement to make the fixed-rate payment side of the swap is the best option for a bank with a strong positive leverage adjusted duration gap to hedge their exposure to interest rate increases. This will allow the bank to effectively lock in a fixed interest rate and reduce their exposure to fluctuations in interest rates. The other choices (currency swap, credit swap, commodity swap, and equity swap) have no direct relation to interest rate risk and would not be effective in hedging the bank's exposure to interest rate increases.

A Bank with a Strong Positive Leverage Adjusted Duration Gap