A bank has a negative duration gap and wishes to hedge to use an interest rate swap to hedge its interest rate risk. The bank should

Question

Quizplus · Accepted Answer

A bank with a negative duration gap benefits when interest rates fall because its liabilities (payments) are more sensitive to interest rate changes than its assets (receivables). By paying a variable rate and receiving a fixed rate in an interest rate swap, the bank can hedge against the risk of rising interest rates, which would be detrimental to its position.

A Bank Has a Negative Duration Gap and Wishes to Hedge