Should Financial Institutions Engage in Interest Rate Swaps for Speculative Purposes? Credit default swaps were once...

Question:

1. Should Financial Institutions Engage in Interest Rate Swaps for Speculative Purposes?
2. Credit default swaps were once viewed as a great innovation for making mortgage markets more stable. Yet, the swaps were sometimes criticized for making the credit crisis worse. Why?
3. Miami Mutual Bank* purchases a two-year interest rate cap for a fee of 3 percent of notional principal valued at $10 million, with an interest rate ceiling of 11 percent and LIBOR as the index representing the market interest rate. At the same time, Miami Mutual sells a two-year floor (8 percent) for a fee of 2 percent of the$10 million principal. Assume that LIBOR is expected to be 7 percent and 14 percent at the end of each of the next two years, respectively. What is this type of strategy called? Also what dollar amount do Miami Mutual Bank stand to gain or lose from this strategy?

*Fun fact why did Leonardo DiCaprio visit this bank in 2002?

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