1. Consider the following balance sheet (expressed in millions of dollars): Assets Overnight loans: $300 1-year...
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1. Consider the following balance sheet (expressed in millions of dollars): Assets Overnight loans: $300 1-year Treasuries: $300 (D* = 0.9 years) 3-year loans: $300 in (D* = 2.5 years) Liabilities Long term debt: $800 (D* = 6 years) Net worth: $100 How would you duration-hedge this balance sheet with an interest rate swap with a fixed-rate side having a modified duration of 4 years and a floating-rate side having a modified duration of 6 months if interest rates increased by 1%? What would be the notional principle (NP) on the swap? a) Receive fixed and pay floating, NP = 600 million b) Receive floating and pay fixed, NP = 720 million c) Receive fixed and pay floating, NP = 850 million d) Receive floating and pay fixed, NP = 1,240 million e) Receive fixed and pay floating, NP = 1,080 million 1. Consider the following balance sheet (expressed in millions of dollars): Assets Overnight loans: $300 1-year Treasuries: $300 (D* = 0.9 years) 3-year loans: $300 in (D* = 2.5 years) Liabilities Long term debt: $800 (D* = 6 years) Net worth: $100 How would you duration-hedge this balance sheet with an interest rate swap with a fixed-rate side having a modified duration of 4 years and a floating-rate side having a modified duration of 6 months if interest rates increased by 1%? What would be the notional principle (NP) on the swap? a) Receive fixed and pay floating, NP = 600 million b) Receive floating and pay fixed, NP = 720 million c) Receive fixed and pay floating, NP = 850 million d) Receive floating and pay fixed, NP = 1,240 million e) Receive fixed and pay floating, NP = 1,080 million
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In order to durationhedge the balance sheet the goal is to make the duration of assets DA match the duration of liabilities DL The durations provided ... View the full answer
Related Book For
A Survey of Mathematics with Applications
ISBN: 978-0134112107
10th edition
Authors: Allen R. Angel, Christine D. Abbott, Dennis Runde
Posted Date:
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