An FI has long-term fixed-rate assets funded by short-term variable-rate liabilities. To protect the equity value,the FI may engage in a swap to pay a _____ rate and receive a _____ interest.

Question

Quizplus · Accepted Answer

By paying a fixed interest rate, the FI can protect itself from the risk of rising interest rates on its long-term fixed-rate liabilities. By receiving a variable interest rate, the FI can benefit from any decreases in short-term interest rates on its variable rate liabilities. This is known as a fixed-for-floating interest rate swap, which is a common way for FIs to manage interest rate risk.

An FI Has Long-Term Fixed-Rate Assets Funded by Short-Term Variable-Rate