16. Ideal Finance has a portfolio of loans and securities expected to generate cash inflows for the bank as follows: Expected Cash Receipts (Gh) Period in Which Receipts Are Expected

1,385,421 Current year

746,872 Two years from today

341,555 Three years from today

62,482 Four years from today

9,871 Five years from today

Deposits and money market borrowings are expected to require the following cash outflows: Expected Cash Payments (Gh) Period in Which Payments Will be Made

1,427,886 Current year

831,454 Two years from today

123,897 Three years from today

1,005 Four years from today

----- Five years from today

If the discount rate applicable to the above cash flows is 8 percent, what is the duration of the firm's portfolio of earning assets and of its deposits and money market borrowings? What will happen to the firm's total returns, assuming all other factors are held constant, if interest rates rise? If interest rates fall? Given the size of the duration gap you have calculated, what type of hedging should the firm engage in? Please be specific about the hedging transactions that are needed and their expected effects. Alternative Scenario 1: Given: The discount rate applicable to Ideal's cash inflows and outflows falls to 6 percent. How does the duration of its earning assets and liabilities change? How does this change affect the firm's sensitivity to interest rate movements? Alternative Scenario 2: Given: The appropriate discount rate climbs to 10 percent. What happens to the durations of Ideal's earning assets and liabilities? How does the interest rate sensitivity of Ideal's total return change as a result of this upward movement in the discount rate?