1) Assume that bank (Y) has $70 million fixed rate assets, $20 million rate sensitive assets, $40 million fixed rate liabilities and $50 million rate sensitive liabilities. Conduct a gap analysis for the bank and show what would happen to profits if interest rate decreases by 3 percentage points.

2) Assume that bank (Z) had $ 95 million of assets having an average duration of 5 years and $105 million of liabilities having an average duration of 7 years. Conduct a duration analysis for the bank and show what will happen to the net worth of the bank if interest rates decrease by 3 percentage points.

3) A. If the bank suffers a deposit outflow of $10 million, what will its balance sheet now look like?

B. Assuming that the required reserve ratio is 10%, do you believe that the bank must make any adjustment in its balance sheet? Why?

C. Using T- accounts propose four policy options the bank can undertake to solve its problem.