3. Consider the following balance sheet (in millions) for an FI: Assets Liabilities Duration = 10 years
Question:
3. Consider the following balance sheet (in millions) for an FI:
Assets Liabilities
Duration = 10 years $950 Duration = 2 years $860
Equity = $90
(a) What is the FI's duration gap?
(b) What is the FI's interest rate risk exposure?
(c) How can the FI use futures and forward contracts to put on a macrohedge?
(d) What is the impact on the FI's equity value if the relative change in interest rates is an
increase of 1 per cent? That is, R/(1+R) = 0.01.
(e) Suppose that the FI in part (c) macrohedges using Treasury Bond (TB) futures that are
currently priced at 96. What is the impact on the FI's futures position if the relative change
in all interest rates is an increase of 1 per cent? That is, R/(1+R) = 0.01. Assume that the
deliverable Treasury Bond has a duration of nine years.
(f) If the FI wants to macrohedge, how many Treasury Bond futures contracts does it need?