A $1,400 million FI has DA = 2.0 years and WLDL = 1.0 years. The managers wish to set the effective duration gap to zero using a swap. The bank is considering a seven year annual payment/annual reset swap with the following terms: Fixed payments at 4.25% with a fixed duration of 6.2 years Variable payments at LIBOR. LIBOR is currently at 4%.The bank can choose to pay or receive either the variable or the fixed.

a) If the bank sets up the swap appropriately, what is the swaps duration and required notional principal? Explain the sign of the swap duration.

b) What is the first year profit change if the bank takes the swap?

c) If fixed rates increase 25 basis points and LIBOR increases 32 basis points what is the predicted swap value change in dollars?

Please show all working in answers.