As a depository institution you have been able to make a large profit recently by borrowing short in the federal funds market and making longer term loans to consumers (cars and housing). You are afraid that in the next two years, short term interest rates will increase, flattening the treasury yield curve.
a) Design a swap based upon the steepness of the US yield curve that will offset the expected deadline in your net interest margin (both of your floating rates in the swap should be tied to different maturity treasury securities).
b) Are you worried about basis risk impacting the ability of the swap you designed in part a) to hedge the flattening of the curve?
c) Would it have been possible to design a swap based upon a fixed and a floating rate instead of two floating rates to hedge your risk in part a)? Show a swap that works or why it will not work.