Exam 24: Swaps

A bank with total assets of $271 million and equity of $31 million has a leverage adjusted duration gap of +0.21 years.One-year maturity notes are currently priced at par and are paying 4.5 percent annually.Two-year maturity notes are currently priced at par and are paying 5 percent annually.The terms of a swap of $100 million notional value of liabilities' payments are 4.95 percent annual fixed payments in exchange for floating rate payments tied to the annual discount yield. What are the expected end-of-year profits or losses if the bank hedges its interest rate risk exposure using the swap?

Why were inverse floaters developed?

Whether fixed-rate or floating-rate,a swap arrangement can be designed to be equivalent to a similar maturity bond.

A U.S.bank has fixed-rate assets in U.S.dollars and variable-rate liabilities in Euros.This bank is exposed to