2. Bank XYZ has the following market-value balance sheet (expressed in millions of dollars): Liabilities 5-year...
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2. Bank XYZ has the following market-value balance sheet (expressed in millions of dollars): Liabilities 5-year CDs Net Worth Assets Short Term Loans Long-Term Loans 1000 500 1350 150 The short-terms loans are zero coupon and repaid at the end of 1 year. The Long-term loans are zero coupon loans that mature in 3 years. On the liability side, the 5-year CDs are also zero coupon. Assume that the yield curve is flat and interest rates are 5% today. Suppose you want to duration hedge the bank's equity by buying a 10-year Treasury STRIP financed with overnight borrowing in the interbank market. How would you hedge against a 1% increase in interest rates using STRIPS? 2. Bank XYZ has the following market-value balance sheet (expressed in millions of dollars): Liabilities 5-year CDs Net Worth Assets Short Term Loans Long-Term Loans 1000 500 1350 150 The short-terms loans are zero coupon and repaid at the end of 1 year. The Long-term loans are zero coupon loans that mature in 3 years. On the liability side, the 5-year CDs are also zero coupon. Assume that the yield curve is flat and interest rates are 5% today. Suppose you want to duration hedge the bank's equity by buying a 10-year Treasury STRIP financed with overnight borrowing in the interbank market. How would you hedge against a 1% increase in interest rates using STRIPS?
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To duration hedge the banks equity we need to match the duration of the assets and liabilities with ... View the full answer
Related Book For
Fundamentals of Corporate Finance
ISBN: 978-0078034640
7th edition
Authors: Richard Brealey, Stewart Myers, Alan Marcus
Posted Date:
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