A banker who is paying a fixed 6 percent rate on CDs for the next two years and is afraid interest rates may go down on new loans,may hedge this exposure with interest rate swaps by

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By swapping a variable rate for a fixed rate, the banker can protect themselves from any potential decreases in interest rates on new loans. This would allow them to continue earning a fixed 6 percent rate on their CDs for the next two years, regardless of the market conditions. Swapping a fixed rate for a variable rate would expose the banker to potential fluctuations in interest rates, which is not the goal of the hedging strategy. Swapping short-term exposure for long-term exposure or vice versa would not address the concern of potential interest rate changes.

A Banker Who Is Paying a Fixed 6 Percent Rate