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2. Snowman Bank, N.A., has a portfolio of loans and securities expected to generate cash inflows for the bank as follows: Expected Cash Inflows of

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2. Snowman Bank, N.A., has a portfolio of loans and securities expected to generate cash inflows for the bank as follows: Expected Cash Inflows of Principal and Interest Payments Annual Period in Which Cash Receipts Are Expected Current year $1500,000 800,000 400,000 70,000 20,000 Two years from today Three years from today Four years from today Five years from today Deposits and money market borrowings are expected to require the following cash outflows: Expected Cash Outflows of Principal and Interest Payments Annual Period during Which Cash Payments Must Be Made $1,500,000 870,000 130,000 20,000 10,000 Current year Two years from today Three years from today Four years from today Five years from today If the discount rate applicable to the previous cash flows is 3.5 percent, what is the duration of the Snowman's portfolio of earning assets and of its deposits and money market borrowings? What will happen to the bank'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, in what type of hedging should Snowman engage? Please be specific about the hedging transactions needed and their expected effects. 2. Snowman Bank, N.A., has a portfolio of loans and securities expected to generate cash inflows for the bank as follows: Expected Cash Inflows of Principal and Interest Payments Annual Period in Which Cash Receipts Are Expected Current year $1500,000 800,000 400,000 70,000 20,000 Two years from today Three years from today Four years from today Five years from today Deposits and money market borrowings are expected to require the following cash outflows: Expected Cash Outflows of Principal and Interest Payments Annual Period during Which Cash Payments Must Be Made $1,500,000 870,000 130,000 20,000 10,000 Current year Two years from today Three years from today Four years from today Five years from today If the discount rate applicable to the previous cash flows is 3.5 percent, what is the duration of the Snowman's portfolio of earning assets and of its deposits and money market borrowings? What will happen to the bank'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, in what type of hedging should Snowman engage? Please be specific about the hedging transactions needed and their expected effects

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