Question
A bank wants to have a duration gap of zero. The market value of its interest-earning assets is $700 million and the assets have an
A bank wants to have a duration gap of zero. The market value of its interest-earning assets is $700 million and the assets have an average duration of five years. The market value of the banks interest-bearing liabilities is $640 million and the liabilities have an average duration of three years. A futures contract on $100,000 of Treasury bonds with a duration of ten years is available.
1) Should the bank take a long or short position in the Treasury bond futures contract? How many contracts should comprise the banks position?
2) Show the effect of this hedging strategy if the interest rate changes from 5% to 6% on the balance sheet and off the balance sheet (futures positions).
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