4. Managing Interest Rate Risk off the Balance Sheet II [19 points] A bank has $1,000,000,000...

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4. Managing Interest Rate Risk off the Balance Sheet II [19 points] A bank has $1,000,000,000 assets with a duration of 10 years and $850,000,000 liabilities with a duration of 2 years. The market discount rates for both assets and liability are 10% EAR. (a) [2 points] What is the leverage-adjusted duration gap of the bank? (b) [2 points] What is the bank's risk exposure; ie, is it worried about the increase or decrease in yields? (c) [2 points] If the bank is considering a futures contract on treasury bonds (face value per bond of $1,000 and duration of 9 years) to do macrohedging with, should the bank long or short a futures contract? (d) [2 points] Suppose the market discount rates increase by 1.1% for both assets and liabilities, does the equity of bank increase or decrease? How much does the equity change using the duration rule? (e) [2 points] Assume no basis risk, suppose each futures contract is on 1000 units of bonds in (c), 4. Managing Interest Rate Risk off the Balance Sheet II [19 points] A bank has $1,000,000,000 assets with a duration of 10 years and $850,000,000 liabilities with a duration of 2 years. The market discount rates for both assets and liability are 10% EAR. (a) [2 points] What is the leverage-adjusted duration gap of the bank? (b) [2 points] What is the bank's risk exposure; ie, is it worried about the increase or decrease in yields? (c) [2 points] If the bank is considering a futures contract on treasury bonds (face value per bond of $1,000 and duration of 9 years) to do macrohedging with, should the bank long or short a futures contract? (d) [2 points] Suppose the market discount rates increase by 1.1% for both assets and liabilities, does the equity of bank increase or decrease? How much does the equity change using the duration rule? (e) [2 points] Assume no basis risk, suppose each futures contract is on 1000 units of bonds in (c),