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lenovo Projected Balance Sheet Consumer 10 ting at 375 Corporate loans 14. Heating rate in rate 16 825 25 Term deposits tooting rate Others Totalasne 200 2540 Equity Total liabilities and equity 2540 The projected balance sheet is prepared on January 1, 2017 and projected items belong to the end of the first quarter. The bank unes short-term liquidity management policy where liquidity maps are funded for only one quarter ahead The three month and sixmonth LIBOR rate as of today are 5.7596 and 6%, respectively Assume that FRAs arc fairly priced .v The bank can borrow at 8% fixed rate or LIBOR +0.20. Another bank in the industry can borrow at 10% fixed rate or LIBOR+0.80. The book value and market value of assets and liabilities are equal The duration of fixed-rate assets is 11 years while the duration of fixed-rate liabilities is 6.5 years Based on the information provided above answer THREE of the following questions Q1) Calculate the expected change in the Net Interest Income of the bank after funding the liquidity gap if interest rates are expected to increase by 2%. (include the impact on both interest income and interest expense). 02) Explain how the bank can use the FRA to hedge its liquidity gap and calculate the bank's payoffs after the end of the first quarter if the three-month LIBOR rate observed on March 31 was 5.8%. Q3) Assuming a notional amount of $100 million, show how the bank can exploit its comparative advantage, if any, using a swap deal. (4) Calculate the economic value of the bank based on the fixed rate assets and liabilities and explain how it relates to the duration gap between assets and liabilities. (include detailed analysis of the bank's convexity risk). Q5) Calculate the value of the prepayment option of the mortgage loans if interest rate expected to go up or down by 20% with equal probabilities. 12 & 1024.95 lenovo Projected Balance Sheet Consumer 10 ting at 375 Corporate loans 14. Heating rate in rate 16 825 25 Term deposits tooting rate Others Totalasne 200 2540 Equity Total liabilities and equity 2540 The projected balance sheet is prepared on January 1, 2017 and projected items belong to the end of the first quarter. The bank unes short-term liquidity management policy where liquidity maps are funded for only one quarter ahead The three month and sixmonth LIBOR rate as of today are 5.7596 and 6%, respectively Assume that FRAs arc fairly priced .v The bank can borrow at 8% fixed rate or LIBOR +0.20. Another bank in the industry can borrow at 10% fixed rate or LIBOR+0.80. The book value and market value of assets and liabilities are equal The duration of fixed-rate assets is 11 years while the duration of fixed-rate liabilities is 6.5 years Based on the information provided above answer THREE of the following questions Q1) Calculate the expected change in the Net Interest Income of the bank after funding the liquidity gap if interest rates are expected to increase by 2%. (include the impact on both interest income and interest expense). 02) Explain how the bank can use the FRA to hedge its liquidity gap and calculate the bank's payoffs after the end of the first quarter if the three-month LIBOR rate observed on March 31 was 5.8%. Q3) Assuming a notional amount of $100 million, show how the bank can exploit its comparative advantage, if any, using a swap deal. (4) Calculate the economic value of the bank based on the fixed rate assets and liabilities and explain how it relates to the duration gap between assets and liabilities. (include detailed analysis of the bank's convexity risk). Q5) Calculate the value of the prepayment option of the mortgage loans if interest rate expected to go up or down by 20% with equal probabilities. 12 & 1024.95