Exam 23: Managing Risk Off the Balance Sheet With Derivative Securities

The safest way to hedge a bond liability with options is to

A bank wishes to reduce its duration gap from 1.2 years to zero by using put options. The bank has $800 million in assets. The underlying bonds on the puts are valued at $115,000 and have a duration of four years. The put options have a delta of 0.58. How many put options are needed? Assume that there is no basis risk on the hedge.

Why is the credit risk on a plain vanilla interest rate swap generally less than the credit risk of a loan with an equivalent (notional)principal amount?