Suppose that your bank owns two assets, $750 in a consumer loan with a 2.2 year duration, and $550 in a municipal bond with a 4.0 year duration.

If your bank actually is funded like Schedule A, what is the bank's interest rate risk exposure? What methods/tools could be used to hedge this? (That is, set out a correct position for using futures, options, swaps, and caps/floors ).

Amount Duration in Years

Schedule A

Small time deposit $700 3.8

Large CD 400 1.5

Equity 200

Schedule B

Small time deposit $575 3.8

Zero Coupon CD 425 4.0

Large CD 100 1.5

Equity 200

Schedule C

Small time deposit $450 3.8

Zero Coupon CD 400 4.0

Large CD 350 1.5

Equity 100

Answer rating: 100% (QA)

SOLUTION To calculate the banks interest rate risk exposure we need to calculate the weighted averag... View the full answer