23-3 FIs may increase fee income by serving as a counterparty for other entities wanting to hedge risk on their own balance sheet.

Question

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Financial institutions (FIs) can earn fee income by providing hedging services to other entities willing to transfer risk in their own balance sheets. As a counterparty, FIs can offset the risk of one party by assuming the opposite side of a transaction or using other financial instruments that align with the needs of the client. For example, a bank could offer currency swaps or interest rate swaps to clients who want to reduce the impact of currency or interest rate fluctuations on their financial performance. By providing these services, FIs can diversify their revenue streams and increase profitability.

23-3 FIs May Increase Fee Income by Serving as a Counterparty