Question

Assume you are a manager of a bank. How you will safeguard the deposits of the customers from financial losses? Explain reasons for your answer

Answer 1

Answer:

Banks use derivatives to hedge, to reduce the risks involved in the bank’s operations. For example, a bank’s financial profile might make it vulnerable to losses from changes in interest rates. The bank could purchase interest rate futures to protect itself. Or a pension fund can protect itself against credit default. Suppose it has invested in corporate bonds and would like to purchase insurance against the possibility of default. The pension fund could purchase a credit default swap