a) The table below displays the balance sheet of XYZ Insurance Company. Market yields are in...

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a) The table below displays the balance sheet of XYZ Insurance Company. Market yields are in parentheses; amounts are in millions of pounds sterling. Assets 1-month T-bills (7.05%) £Liabilities and Equity 50 Ovemight repos 150 Subordinated debt, 7-year fixed rate 350 50 3-month T-bills (7.25%) (8.55%) 2-year T-notes (7.50%) 30-year mortgage (8.20% floating rate reset every 6 months) Total 100 130 Equity 30 430 Total 430 (i) What is the repricing gap if the planning period is three months? Six months? (ii) What is the impact over the next three months on net interest income if interest rates on rate sensitive assets increase 30 basis points while interest rates on rate sensitive liabilities increase S55 basis points? (iii) Analytically discuss the repricing model for measuring interest rate risk and comment upon its main weakness. b) ABC bank has the following balance sheet: Assets Cash 5-year Treasury notes 30-year mortgages Total assets Liabilities and Equity Demand deposits 1-year certificates of deposit Equity Total liabilities and equity S60 60 $140 160 200 $320 20 $320 Calculate the maturity gap for ABC bank and explain whether ABC bank is more exposed to an increase or decrease in interest rates. c) Use the appropriate model to discuss the three factors that affect changes in the net worth of a financial institution when interest rate change. Assume that only duration is used for portfolio immunization purposes a) The table below displays the balance sheet of XYZ Insurance Company. Market yields are in parentheses; amounts are in millions of pounds sterling. Assets 1-month T-bills (7.05%) £Liabilities and Equity 50 Ovemight repos 150 Subordinated debt, 7-year fixed rate 350 50 3-month T-bills (7.25%) (8.55%) 2-year T-notes (7.50%) 30-year mortgage (8.20% floating rate reset every 6 months) Total 100 130 Equity 30 430 Total 430 (i) What is the repricing gap if the planning period is three months? Six months? (ii) What is the impact over the next three months on net interest income if interest rates on rate sensitive assets increase 30 basis points while interest rates on rate sensitive liabilities increase S55 basis points? (iii) Analytically discuss the repricing model for measuring interest rate risk and comment upon its main weakness. b) ABC bank has the following balance sheet: Assets Cash 5-year Treasury notes 30-year mortgages Total assets Liabilities and Equity Demand deposits 1-year certificates of deposit Equity Total liabilities and equity S60 60 $140 160 200 $320 20 $320 Calculate the maturity gap for ABC bank and explain whether ABC bank is more exposed to an increase or decrease in interest rates. c) Use the appropriate model to discuss the three factors that affect changes in the net worth of a financial institution when interest rate change. Assume that only duration is used for portfolio immunization purposes

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Answer Solution A i Calculation of repricing Gap For 3 Months Change in amount due interest on Asset ... View the full answer