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Bank A has $100 million of mortgages with an adjustable rate of HIBOR + 2%. These assetsare financed with $100 million of fixed-rate deposits costing...

Bank A has $100 million of mortgages with an adjustable rate of HIBOR + 2%. These assetsare financed with $100 million of fixed-rate deposits costing 5%. Bank B has $100 millioninvestment of fixed-income notes with a fixed rate of 7%, which are financed with $100 millionin CDs with a variable rate of HIBOR + 1%.a) Discuss the particular interest rate risk each bank faces.b) Assuming equal negotiation power, propose a feasible interest rate swap and demonstratehow such a swap may help both banks from hedging their interest rate risk in question bycomputation of the net position and net funding cost for each bank as a result of theproposed swap. (Hint: equal negotiation power should prompt the two parties to look foreither the same net position or the same savings on funding cost as the case may apply.)

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