An S&L has the following characteristics
Assets ($M)	450
Duration Assets	5.5
Liabilities ($M)	325
Duration Liabilities	4
Yields on Assets & Liabilities (%)	4.50%
Option		Premiums ($ per $100 of face amount)
Call	0.3	0.25
Put	-0.5	0.35
Underlying Instrument on Options	US Treasury
Price ($ per $100 of face amount)	95
Duration	6
Yield to maturity	4.50%

a. Which type of option should be used to immunize the S&L?

b. How many options should be used?

c. What happens to economic value of equity if rates rise 75bps?

d. What happens to the options hedge if rates rise 75bps?

e. What is the cost of the options hedge?

f. How much do interest rates need to move against the hedge position for the increase in economic value of equity to offset the hedge costs?

Answer rating: 100% (QA)

a Type of Option to Use for Immunization Since the duration of assets is greater than liabilities we ... View the full answer