Question #16
Reading: Reading 25 The Term Structure and Interest Rate Dynamics
PDF File: Reading 25 The Term Structure and Interest Rate Dynamics.pdf
Page: 6
Status: Unattempted
Correct Answer: B
Question
Independence Bank is a small retail bank that specializes in demand deposits and invests in CMO tranches. For the purpose of valuation of Independence Bank's assets and liabilities, the most appropriate reference yield curve would be:
Answer Choices:
A. MRR-OIS curve
B. government spot curve
C. swap rate curve
Explanation
While wholesale banks extensively hedge their assets and/or liabilities using the swap
market, retail banks typically have very little exposure to the swap market. Accordingly,
the government spot curve is most appropriate for retail banks while the swap rate curve
may be most appropriate for wholesale banks.