Question: Problem Solving Activity 1 Suppose a bank has just advanced $3 million worth 1-year fixed-rate loans (earning 5.0% pa) financed by issuing a 1-year variable-rate

Problem Solving Activity 1

  • Suppose a bank has just advanced $3 million worth 1-year fixed-rate loans (earning 5.0% pa) financed by issuing a 1-year variable-rate CD (paying 3.5% pa).

a) Calculate net interest income (NII). What is the impact on NII if rates increase from 3.5% pa to 4% pa?

b) What would be the appropriate futures strategy?

c) Calculate the gains/losses on the futures trade if interest rate futures (IRFs) price, Fp

= $97 per $100 Face Value now and $96.50 per $100 Face Value later? Is the hedge perfect?

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