What is the risk exposure of the commercial bank

Reference no: EM132208144

Question - A commercial bank has $400 million of floating rate loans yielding the T-Bills rate plus 5%. These loans are financed with $400 million fixed rate deposit costing 8%. A savings bank has $400 million of mortgages with a fixed rate of 12%. They are financed with $400 million in CDs with a variable rate of T-Bill rate plus 4 percent.

a) What is the risk exposure of the commercial bank?

b) What is the risk exposure of the savings Bank?

c) Which institution would be the buyer and which one would the seller of an interest rate Swap agreement if they indeed entered into a SWAP agreement? Give an example of a swap agreement between the two banks.

d) Draw the direction of cash flows and explain one possible Swap agreement that would be a perfect hedge for interest rate risk for both institutions.

Reference no: EM132208144

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