Use DGAP analysis to determine if there is interest rate risk in the following transaction: A bank obtains $ 25,000 in funds from a customer who makes a deposit with a five- year maturity that pays 5 percent annual interest compounded daily. All interest and principal are paid at the end of five years. Simultaneously, the bank makes a $ 25,000 loan to an individual to buy a car. The loan is at a fixed rate of 12 percent annual interest but is fully amortized with 60 monthly payments, such that the borrower pays the same dollar amount (principal plus interest) each month.
Answer to relevant QuestionsCompare the strengths and weaknesses of GAP and earnings sensitivity analysis with DGAP and EVE sensitivity analysis. A bank has assets of $ 10 million earning an average yield of 5 percent with a weighted duration of 1.5 years. It has liabilities of $ 9 million paying an average rate of 1.5 percent with a weighted duration of 3.5 years. ...A basic interest rate swap is priced as a zero net present value transaction. Explain what this means. Use the two year swap data to demonstrate your arguments. Assume that you bought an interest rate cap on three- month LIBOR with a 2.50 percent strike rate. The current rate for three- month LIBOR is 2.28 percent. a. What will happen to the premium (value) on this cap if LIBOR ...A bank plans to hedge using three month Eurodollar futures contracts based on $ 1 million in principal. Determine how many contracts the bank should trade (its hedge ratio) in the following situations: a. The bank will roll ...
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