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Hedging interest rate risk

6.3 Swaps with intermediaries

 Bank offers two rates

– The ‘ask rate’ at which the bank is willing to receive a fixed interest cash
flow stream in exchange for paying LIBOR.

– The ‘bid rate’ that they are willing to pay in exchange for receiving LIBOR.

 The difference between these gives the bank’s profit margin and is usually at
least 2 basis points.

Illustrations and further practice

Now try Illustrations 4 and 5 and TYU 8 and TYU 9 in Chapter 11

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