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A bank has the following information: Assets ( $M ) 1 7 5 Asset Duration ( Yrs ) 5 . 2 5 Liabilities ( $M
A bank has the following information:
Assets $M
Asset Duration Yrs
Liabilities $M
Liability Duration Yrs
Market yields
The bank wants to hedge with a Eurodollar futures contract with the following characteristics
Price of face value
Rate on Eurodollar CDs
Duration of Eurodollar contracts
a What is the correct strategy for hedging futures to offset losses on the bank portfolio and why?
b Assuming spot and futures price move in a to manner, how many futures contracts are needed to fully hedge the bank portfolio?
c If rates were to rise or fall by bps show that the hedge would leave the bank immunized
d If instead of using Eurodollar futures the bank used Treasury bond futures with the following characteristics
how many futures contracts would it need to fully immunize the balance sheet?
Treasury futures Price of face value $
Yield
Duration
e What considerations would help make the decision whether to go with Treasury or Eurodollar futures?
f Suppose that for every change in spot rates, futures rates change by What number of contracts using Eurodollar
futures contracts would be needed and why?
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