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Discuss the usefulness of swaptions (swap options) relative to the current economic environment. Give three specific examples of how a bank can use this derivative both for risk management and speculation.

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The current economic environment is such that the interest rates are expected to increase. The first reason is that the US Federal Reserve is likely to decrease quantitative easing. This is expected to cause interest rates to increase. The second reason is that the Fed rate of 0.25% is also likely to be increased in near ...

Solution Summary

The answer to this problem explains the use of swaptions in the current economic background. The references related to the answer are also included.