A financial institution has the following balance sheet as of year-end 2020. Current interest rates are 3%. Futures contracts are available on 20-year, 2%-coupon Treasury bonds. The contract size is $1M. The duration of the underlying bonds (DE) is 10.5 years [HINT: Need to compute the Treasury bond"s price first). 1. Should the manager buy or sell futures contracts to hedge interest rate risk? 2. How many futures contracts (Ne) must be used to hedge the position? 3. What is the change in the futures contract position (AF) if interest rates do indeed increase by 1% (100 basis points)? Bank of Mississippi (US$ million) Assets FYE 2020 Duration Liabilities and Equity FYE 2020 Duration Cash $100 Deposits $3,000 1 T-bills $100 0.5 Federal funds $500 0.25 Treasury notes $1,000 1 Other borrowings $1,000 3 Treasury bonds $1,500 2 Total liabilities $4,500 Loans $2,300 3 Equity $500 Total assets $5,000 Total liabilities and equity $5,000 A financial institution has the following balance sheet as of year-end 2020. Current interest rates are 3%. Futures contracts are available on 20-year, 2%-coupon Treasury bonds. The contract size is $1M. The duration of the underlying bonds (DE) is 10.5 years [HINT: Need to compute the Treasury bond"s price first). 1. Should the manager buy or sell futures contracts to hedge interest rate risk? 2. How many futures contracts (Ne) must be used to hedge the position? 3. What is the change in the futures contract position (AF) if interest rates do indeed increase by 1% (100 basis points)? Bank of Mississippi (US$ million) Assets FYE 2020 Duration Liabilities and Equity FYE 2020 Duration Cash $100 Deposits $3,000 1 T-bills $100 0.5 Federal funds $500 0.25 Treasury notes $1,000 1 Other borrowings $1,000 3 Treasury bonds $1,500 2 Total liabilities $4,500 Loans $2,300 3 Equity $500 Total assets $5,000 Total liabilities and equity $5,000