(15 points) Consider the following balance sheet (in millions) for an FI:

Assets Liabilities

Duration = 10 years $950 Duration = 2 years $860

Equity $90

What is the FI's duration gap?

What is the FI's interest rate risk exposure and how should it use futures contracts to hedge its risk?

What is the impact on the FI's equity value if the relative change in interest rates is an increase of 1 percent? That is, DR/(1+R) = 0.01.

Suppose that the FI decided to hedge the risk with Treasury bond futures that are currently priced at 96. What is the impact on the FI's futures position if the relative change in all interest rates is an increase of 1 percent? That is, DR/(1+R) = 0.01. Assume that the deliverable Treasury bond has a duration of 9 years.

If the FI wanted a perfect macrohedge, how many Treasury bond futures contracts does it need?