1. A bank purchases a six-month $3 million Eurodollar deposit at an interest rate of 6.7 percent per year. It invests the funds in a six-month Swedish krona bond paying 7.5 percent per year. The current spot rate of U.S. dollars for Swedish krona is $0.1790/SKr.
2. Consider the following balance sheet (in millions) for an FI:
3. An FI has a $280 million asset portfolio that has an average duration of 7.9 years. The average duration of its $240 million in liabilities is 4.2 years. Assets and liabilities are yielding 10 percent. The FI uses put options on T-bonds to hedge against unexpected interest rate increases. The average delta () of the put options has been estimated at 0.2 and the average duration of the T-bonds is 8.4 years. The current market value of the T-bonds is $94,000.Put options on T-bonds are selling at a premium of $1.05 per face value of $100.