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

Question

Quizplus · Accepted Answer

An FI with a positive funding gap has more liabilities than assets, which means that it is more exposed to interest rate risk on its liabilities than on its assets. To hedge this risk exposure, the FI should enter into a swap where it swaps in floating-rate payments (typically on its liabilities) for fixed-rate payments. This will enable the FI to lock in a fixed-rate funding cost and reduce its interest rate risk exposure.

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