Explain, using your own example, how interest rate swaps help banks hedge against interest rate risk?

B. Are Swaps optimal methods for risk transfer? Why or Why not?

C. What are the advantages and disadvantages of IRS over other methods of interest rate risk immunization?

D An Insurance company owns $500 million of floating-rate bonds yielding T. Bills plus 1 percent. These loans are financed with $500 million of fixed rate guaranteed investment contracts (GICs) costing 12%. A Finance company has $500 million in auto loans with a fixed rate of 15%. These loans are financed with $500 million in CDs at a variable rate of T. Bills plus 5%. What would happen if the Treasury Bills rate increased by 2% from current yields because of market conditions?
• What is the risk exposure of the Insurance Company?
• What is the risk exposure of the Finance Company?
• What would be the cash flows of each company if they enter a SWAP?