Question 1 (75 marks in total)

You have been asked to report to Management on the current risk profile of

the bank.

(a) Draw the cashflow ladder for NBA's interest rate sensitive assets and

liabilities and the net cashflow. You should use the following time buckets;

Time 0 for Call or overnight exposures and then six-monthly buckets up to

5 years (e.g. 6 months, 12 months, 18 months etc.). (20 marks)

(b) Using the Zero-Coupon equivalent interest rates calculated from market

interest rates shown, in Table 2; calculate the PVBP for each of the "time

bucket" cashflows in the Cashflow Ladder and the total PVBP, for all

interest rate sensitive assets and liabilities? (15 marks)

The Head of Markets has suggested that the bank enter into the following hedging

transactions to manage the banks risks.

1. Lend 6/12 FRA for $150m @ 1.70%pa

2. Lend 12/18 FRA for $50m @ 1.6%pa

3. Pay Fixed 3 year Interest Rate Swap (IRS) for $20m @ 2.24%pa

semi-annual payments.

4. Pay Fixed 5 year Interest Rate Swap (IRS) for $65m @ 2.46%pa

semi-annual payments.

(c) If these recommendations were adopted show the effect of these

transactions on the cashflow ladder calculated in (a) above. (20 marks)

(d) Using the Zero-Coupon equivalent interest rates calculated from market

interest rates shown, in Table 2; calculate the PVBP for each of the "time

bucket" cashflows in the Cashflow Ladder and the total PVBP, for all

interest rate sensitive assets and liabilities? (10 marks)

(e) What do the results from the analysis in (c) and (d) tell you about the bank's

risk profile if the hedges were undertaken? (10 marks)