A bank with long-term fixed-rate assets funded with short-term rate-sensitive liabilities could do which of the following to limit their interest rate risk?
I. Buy a cap.
II. Buy an interest rate swap.
III. Buy a floor.
IV. Sell an interest rate swap.

Question

Quizplus · Accepted Answer

Buying a cap can protect the bank from rising interest rates, which would increase the cost of its short-term liabilities. Buying an interest rate swap can allow the bank to exchange its fixed-rate asset returns for floating rates, aligning its assets more closely with its liabilities.

A Bank with Long-Term Fixed-Rate Assets Funded with Short-Term Rate-Sensitive