QUESTION 4a [7 Marks]

Use this balance sheet information to answer the following questions:

Balance Sheet (Amount in millions, Duration in years)
Assets	Amount	Duration	Liabilities	Amount	Duration
Cash	340	?	Core Deposits	350	1.5 yrs
Treasury Bills	120	0.25 yrs	Euro CDs	495	1.0 yrs
Loans (hybrid)	500	1.75 yrs	Debentures A	300	3.0 yrs
Loans (variable)	310	0.5 yrs	Debentures B	275	5.0 yrs
Loans (fixed)	275	3.5 yrs	Equity	?

The ALCO committee believes that = - 0.01 would be a reasonable estimate of relevant interest rate movements.

If the 90-day bank bill futures are quoted at 97.0 and there is no basis risk calculate the number of future contracts to macro-hedge the bank's balance sheet.

Show all calculations and specifically state whether a short or long position is recommended.

QUESTION 4b [3 Marks]

Another alternative suggested by a young graduate was to pay off the Debenture B. Explain why this alternative had merits from a duration perspective. Be specific