For what purposes do financial institutions sometimes use interest rate swaps?

Financial institutions utilize interest rate swaps for both hedging and speculative purposes, which is why the selection is accurate. The primary use of interest rate swaps is to manage exposure to fluctuations in interest rates, allowing institutions to hedge against potential losses that may arise from interest rate movements. For example, a firm that has a fixed-rate loan might enter into a swap to exchange its fixed-rate payments for floating-rate payments, thereby aligning its cash flows with market interest rates.

In addition to hedging, financial institutions also engage in interest rate swaps for speculative purposes. They may take positions in swaps to bet on the direction of future interest rate movements, aiming to generate profit from these trades. For instance, an entity might speculate that interest rates will decrease and enter into a swap that benefits from falling rates. This dual functionality highlights the flexibility and strategic value of interest rate swaps in various market conditions.

Other choices are limited in scope. Some suggest that these swaps are used only for hedging, which neglects the potential for speculative strategies. Others may indicate regulatory compliance as a purpose, yet that does not fundamentally represent the primary motivations of using swaps in financial markets. Thus, the dual use for both hedging and speculation explains the comprehensive nature of why financial institutions engage in interest