4. Given the magnitude of BSB's exposure to interest rate risk in the cash market at each phase of the minority lending project, what is the appropriate number of futures contracts the bank should buy or sell in order to immunize its exposure to interest rate risk?
Bay Street Bankcorp Hedging Interest Rate Risk with Financial Futures Michael Wang, president of Bay Street Bankcorp, peered anxiously at the thick envelope sitting on his desk from the Federal National Mortgage Association. Michael realized the envelope contained Fannie Mae's response to his request that the agency invest $5 million in the fledgling bank over the next year to expand BSB's highly successful and innovative minority lending program. Taking a deep breath, Michael quickly tore open the envelope and scanned the cover letter. He read no further than the second paragraph to learn that the FNMA had approved his funding request. BSB would become only the seventh bank in the United States to receive equity capital from Fannie Mae; the bank now stood on the verge of an ambitious and innovative expansion plan. The plan was full of risks. But Michael, and now Fannie Mae, felt it was the right thing to do. Bay Street Bankcorp was chartered in 1991 and opened for business in a large, south- western city with a substantial population of Asian, Hispanic, and African American resi- dents. In a hotly competitive banking market, BSB grew quickly and confidently by offering a unique product mix tailored to the needs of first-generation Asian immigrants The majority of the bank's common stock was owned by Taiwanese immigrants, and BSB's management team understood its basic business strategy well As the bank gained experience in minority lending to small Vietnamese, Chinese, and Taiwanese entrepreneurs, it started to reach out in the community to other minority groups BSB opened a second office in 1993 in the barrio to serve the needs of the Hispanic com- munity, and now planned a third office in the inner city to gain entry into the African Amer- ican community Over the course of its brief history, BSB succeeded by doing the little things that the mega-banks in town neglected. The bank's main office manager was an American-born de- scendent of first-generation Chinese immigrants who was fluent in both Chinese and Viet nnvaea Th.hane m' ' nter litarahre was alwavs available in four different Bay Street Bankcorp Hedging Interest Rate Risk with Financial Futures Michael Wang, president of Bay Street Bankcorp, peered anxiously at the thick envelope sitting on his desk from the Federal National Mortgage Association. Michael realized the envelope contained Fannie Mae's response to his request that the agency invest $5 million in the fledgling bank over the next year to expand BSB's highly successful and innovative minority lending program. Taking a deep breath, Michael quickly tore open the envelope and scanned the cover letter. He read no further than the second paragraph to learn that the FNMA had approved his funding request. BSB would become only the seventh bank in the United States to receive equity capital from Fannie Mae; the bank now stood on the verge of an ambitious and innovative expansion plan. The plan was full of risks. But Michael, and now Fannie Mae, felt it was the right thing to do. Bay Street Bankcorp was chartered in 1991 and opened for business in a large, south- western city with a substantial population of Asian, Hispanic, and African American resi- dents. In a hotly competitive banking market, BSB grew quickly and confidently by offering a unique product mix tailored to the needs of first-generation Asian immigrants The majority of the bank's common stock was owned by Taiwanese immigrants, and BSB's management team understood its basic business strategy well As the bank gained experience in minority lending to small Vietnamese, Chinese, and Taiwanese entrepreneurs, it started to reach out in the community to other minority groups BSB opened a second office in 1993 in the barrio to serve the needs of the Hispanic com- munity, and now planned a third office in the inner city to gain entry into the African Amer- ican community Over the course of its brief history, BSB succeeded by doing the little things that the mega-banks in town neglected. The bank's main office manager was an American-born de- scendent of first-generation Chinese immigrants who was fluent in both Chinese and Viet nnvaea Th.hane m' ' nter litarahre was alwavs available in four different
