Question

Banks quote interest rate and currency swaps using the 6-month LIBOR as a basis for both transactions. How can a bank make money if it does not speculate on movements in either interest rates or exchange rates?

Answer 1

In this case, the Bank quote fixed side of swap with the Bid Ask spread. whenever the payment is made in fixed interest rate side of swap, they will make at lower rate than the amount they receive on the fixed rate side of the swap from counterparty. If in case, they are in a position to balance the transaction that is being receiver of fixed interest rate and payer of fixed interest rate for some amount of principal they will earn Bid-Ask spread. This amount will be the substantial amount