Briefly explain what a negative duration gap implies regarding the direction of the sensitivity of a...
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Briefly explain what a negative duration gap implies regarding the direction of the sensitivity of a bank's profitability to interest rates. What would be the impact of a negative interest rate shock on banks equity? Explain clearly. b) What are the two ways for a financial institution to hedge interest exposure to interest rates? c) Assuming you observe the current price So of a stock being $50 and the current price of a futures contract with 3-month maturity written on the stock being Fo-$55. The risk-free interest rate r is 8%. Is there an arbitrage opportunity in the market? If yes, what is the arbitrage strategy and the respective arbitrage profit from this strategy? Briefly explain what a negative duration gap implies regarding the direction of the sensitivity of a bank's profitability to interest rates. What would be the impact of a negative interest rate shock on banks equity? Explain clearly. b) What are the two ways for a financial institution to hedge interest exposure to interest rates? c) Assuming you observe the current price So of a stock being $50 and the current price of a futures contract with 3-month maturity written on the stock being Fo-$55. The risk-free interest rate r is 8%. Is there an arbitrage opportunity in the market? If yes, what is the arbitrage strategy and the respective arbitrage profit from this strategy?
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a A negative duration gap in a banks balance sheet indicates that the banks liabilities such as deposits have a longer duration than its assets such a... View the full answer
Related Book For
Fundamentals of corporate finance
ISBN: 978-0470876442
2nd Edition
Authors: Robert Parrino, David S. Kidwell, Thomas W. Bates
Posted Date:
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