1.Tree Row Bank has assets of $150 million, liabilities of $135 million, and equity of $15 million. The asset duration is six years and the duration of the liabilities is four years. Market interest rates are 10 per cent. Tree Row Bank wishes to hedge the balance sheet with 20-year T-bond futures contracts, which are currently trading at 91.4705 (i.e. a yield of 8.5295%), and so have a price quote equivalent of $95 per $100 face value, 8 per cent coupon on the bond underlying the contract.

Should the bank go short or long on the futures contracts to establish the correct macrohedge?

How many contracts are necessary to fully hedge the bank?

Verify that the change in the futures position will offset the change in the cash balance sheet position for a change in market interest rates of plus 100 basis points and minus 50 basis points.

If the bank had hedged with bank accepted bill futures contracts that had a market value of $98 per $100 of face value, how many futures contracts would have been necessary to hedge fully the balance sheet?

What additional issues should be considered by the bank in choosing between T-bond or bank accepted bill futures contracts? LO 7.2, 7.3