In each of the following cases, conduct the analysis for Step 1 and Step 2 (page 339 in this chapter) in evaluating a hedge. Specifically assess cash market risk and determine whether the bank should buy or sell financial futures as a hedge. Explain how the hedge should work.
a. The bank expects to receive a large, past due principal payment on a loan in 45 days. b. A deposit customer notifies the bank that she will be withdrawing $ 5 million in 60 days. The bank will sell a Treasury security from its investment portfolio at that time to cover the withdrawal.
c. The bank has agreed to make a one year fixed rate loan at 6.5 percent. It will fund the loan by issuing four consecutive three month Eurodollar time deposits. It would like to lock in its borrowing costs on the Eurodollar time deposits.
d. The bank just won a $ 10 million court settlement against a supplier and will receive the payment in three months.
e. In order to improve the bank’s capital position, management decides to issue 15 year subordinated debentures (bonds). Unfortunately, this debt offering cannot be ready for another five months.