An existing swap can be effectively hedged against interest rate risk by
A)selling out to another party.
B)entering into another swap agreement that is the mirror image of the original swap.
C)setting interest sensitive assets equal to interest sensitive liabilities.
D)setting asset duration equal to liability duration.
E)defaulting to the swap intermediary.

Question

Quizplus · Accepted Answer

Entering into another swap agreement that is the mirror image of the original swap, commonly referred to as a "reverse swap", results in the existing swap being effectively hedged against interest rate risk. The two swaps offset each other and minimize the impact of interest rate fluctuations.

An Existing Swap Can Be Effectively Hedged Against Interest Rate