Question
(a) Consider the following information for a bank: Assets 220mil, duration of 1.397years. Liabilities 200mil, duration of 0.5535year. (i) What is the banks leverage-adjusted duration
(a) Consider the following information for a bank: Assets 220mil, duration of 1.397years. Liabilities 200mil, duration of 0.5535year.
(i) What is the banks leverage-adjusted duration gap? (in years, answer in 4 decimal places)
(ii) Briefly explain the banks interest rate exposure from your calculation in (a).
(iii) If interest rates rise by 1%, what is the new market value of the banks equity? (answer in mil)
(b) A bank is looking to hedge its interest rate risk with a $100mm notional long put option (a FLOOR) of 10%, paying premium of 0.5% of face value.
(i) If interest rate falls to 8%, what is the net profit? (answer in mil)
(ii) What kind of balance sheet should you expect the bank to have when buying this put option as a hedge?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started