Question Two Answer all parts Show all your workings (a) Mandan Bank has assets consisting of $4.0 billion in cash, $10.0 billion of short- term loans with a modified duration of 2.2655, and $95.0 billion of 4.0% fixed rate interest-only mortgages (with annual payment and compounding) with an average life of 13 years and currently trading at par. Mandan also has 80.0 billion of 4.0% fixed rate liabilities consisting entirely of 3-year (annual pay) certificates of deposit, currently trading at par. (i) Using the duration gap (DG) method, calculate Mandan Bank's exposure to an unexpected 75bp parallel increase in interest rates. Explain your answer. (14 marks) (ii) Using the DG method, calculate what unexpected parallel increase in interest rates would completely eradicate Mandan Bank's equity? (3 marks) (b) Mandan Bank wishes to immunise its balance sheet against unexpected interest rate changes with a classic T-bond contract currently priced at $105.00 (in decimal form). The cheapest to deliver bond against this contract is a 16 year, 5.0% coupon bond currently priced at $94.725 (in decimal form). (i) Calculate the cost of the cheapest to deliver bond. (6 marks) (ii) How many futures contracts are necessary to immunise Mandan Bank's balance sheet? (7 marks) (Total: 30 marks) Question Two Answer all parts Show all your workings (a) Mandan Bank has assets consisting of $4.0 billion in cash, $10.0 billion of short- term loans with a modified duration of 2.2655, and $95.0 billion of 4.0% fixed rate interest-only mortgages (with annual payment and compounding) with an average life of 13 years and currently trading at par. Mandan also has 80.0 billion of 4.0% fixed rate liabilities consisting entirely of 3-year (annual pay) certificates of deposit, currently trading at par. (i) Using the duration gap (DG) method, calculate Mandan Bank's exposure to an unexpected 75bp parallel increase in interest rates. Explain your answer. (14 marks) (ii) Using the DG method, calculate what unexpected parallel increase in interest rates would completely eradicate Mandan Bank's equity? (3 marks) (b) Mandan Bank wishes to immunise its balance sheet against unexpected interest rate changes with a classic T-bond contract currently priced at $105.00 (in decimal form). The cheapest to deliver bond against this contract is a 16 year, 5.0% coupon bond currently priced at $94.725 (in decimal form). (i) Calculate the cost of the cheapest to deliver bond. (6 marks) (ii) How many futures contracts are necessary to immunise Mandan Bank's balance sheet? (7 marks) (Total: 30 marks)