What kind of interest rate swap (of liabilities) would an FI with a positive funding gap utilize to hedge interest rate risk exposure?
A)Swap floating-rate payments for fixed-rate payments.
B)Swap floating-rate receipts for fixed-rate payments.
C)Swap fixed-rate receipts for floating-rate receipts.
D)Swap floating-rate receipts for fixed-rate receipts.
E)Swap floating-rate payments for fixed-rate receipts.

Question

Quizplus · Accepted Answer

An FI with a positive funding gap would have more liabilities than assets that are earning interest. Therefore, it would swap floating-rate payments (which it has on liabilities) for fixed-rate payments (which it can pay by investing in fixed-income assets). This would lower the interest rate risk exposure of the FI.

What Kind of Interest Rate Swap (Of Liabilities) Would an FI