Reconsider Tree Row Bank in problem 16 but assume that the cost rate on the liabilities is 6 percent. On-balance-sheet rates are expected to increase by 100 basis points. Further, assume there is basis risk such that rates on 3-month Eurodollar CDs are expected to change by 0.10 times the rate change on assets and liabilities. That is, Δ RF  0.10  Δ R.

a. How many contracts are necessary to fully hedge the bank?

b. 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.

c. If the bank had hedged with Treasury bond futures contracts that had a market value of $95 per $100 of face value, a yield of 8.5295 percent, and a duration of 10.3725 years, how many futures contracts would have been necessary to fully hedge the balance sheet? Assume there is basis risk such that rates on T-bonds are expected to change by 0.75 times the rate change on assets and liabilities. That is, Δ RF  0.75  Δ R.