Financial institution use four major strategies to manage
interest -rate risk. Select two for these strategies and describe
how they are used to manage interest-rate risk.
Briefly explain one internal hedging technique that financial
institution may use to manage interest rate risk. Why might it be
impossible to eliminate the risk completely?
Define each of the following hedging techniques and explain how
each is used to minimize interest rate risk
a) Global cash netting
b) Embedded options in debt
c) Forward Rate Agreements
d) Zero-Coupon Swaps
What type of interest rate risk will be occurred when Financial
Institution holds liabilities with maturity that are greater than
the maturities of its assets? Explain what will be the impact on
earnings when there are changes in the rate of interest. Justify
your answer with support.
Describe financial institution risk exposures and how to manage
these risks. Hint: risk exposures show themselves both within
quoted interest rates and on financial institution’s balance
sheets. The institutions try to manage those risks both on and off
the balance sheet. Given the COVID-19 environment, your answer
should definitely include a discussion of how default risk has
become more apparent in the last couple of months.
Describe financial institution risk exposures and how to manage
these risks. Hint: risk exposures show themselves both within
quoted interest rates and on financial institution’s balance
sheets. The institutions try to manage those risks both on and off
the balance sheet. Given the COVID-19 environment, your answer
should definitely include a discussion of how default risk has
become more apparent in the last couple of months.
Starbucks defines market risk in its 10-K. How is this defined,
what steps does it take to manage it financial risk in these areas:
commodity price risk, foreign currency exchange risk, equity
security price risk, and interest rate risk? (Look in SEC EDGAR
site).
How can futures be used to manage interest rate risk in a fixed
income portfolio? How can futures be used to manage beta in an
equity portfolio? Explain the mechanics of a fixed-floating swap,
describing the rationale for each participant.