On January 4, 2015, an FI has the following balance sheet (rates = 10 percent) DGAP =

Question:

On January 4, 2015, an FI has the following (rates = 10 percent)

On January 4, 2015, an FI has the following balance

DGAP = [6 €“ (170/200)4] = 2.6 years > 0
The FI manager thinks rates will increase by 0.75 percent in the next three months. If this happens, the equity value will change by:

The FI manager will hedge this interest rate risk with either futures contracts or option contracts.
If the FI uses futures, it will select June T-bonds to hedge. The duration on the T-bonds underlying the contract is 14.5 years, and the T-bonds are selling at a price of $114.34375 per $100, or $114,343.75. T-bond futures rates, currently 9 percent, are expected to increase by 1.25 percent over the next three months.

If by April 4, 2015, balance sheet rates increase by 0.8 percent, futures rates by 1.4 percent, and T-bond rates underlying the option contract by 1.3 percent, would the FI have been better off using the futures contract or the option contract as its hedge instrument?

Balance Sheet
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial...