3. A financial institution with total asset size of $2.6 million and asset dollar duration of...
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3. A financial institution with total asset size of $2.6 million and asset dollar duration of $18.4 million has total liabilities of $1.6 million and dollar duration of $4.8 million. The duration of a 10-year coupon bond with the notional amount $100 paying 6% semiannually is 8.33. (a) What position in the coupon bond should the bank assume to hedge the duration risk of its equity? (b) Find duration and dollar duration of a fixed-for-floating (i.e. paying fixed) 10-year interest rate swap with 6% seminannual cash flows per $100 notional amount. (c) If the financial institution wants to use the interest rate swap from (b) to hedge the interest rate risk of its equity, what should be the notional amount of the swap position? 3. A financial institution with total asset size of $2.6 million and asset dollar duration of $18.4 million has total liabilities of $1.6 million and dollar duration of $4.8 million. The duration of a 10-year coupon bond with the notional amount $100 paying 6% semiannually is 8.33. (a) What position in the coupon bond should the bank assume to hedge the duration risk of its equity? (b) Find duration and dollar duration of a fixed-for-floating (i.e. paying fixed) 10-year interest rate swap with 6% seminannual cash flows per $100 notional amount. (c) If the financial institution wants to use the interest rate swap from (b) to hedge the interest rate risk of its equity, what should be the notional amount of the swap position?
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a In order to hedge the duration risk of its equity the bank should assume a long position ... View the full answer
Related Book For
Personal Financial Planning
ISBN: 978-1111971632
13th edition
Authors: Lawrence J. Gitman, Michael D. Joehnk, Randy Billingsley
Posted Date:
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