Question
After conducting a rate-sensitive analysis, a bank finds itself with the following amounts of rate-sensitive assets and liabilities (RSAs and RSL) and fixed-rate assets and
After conducting a rate-sensitive analysis, a bank finds itself with the following amounts of rate-sensitive assets and liabilities (RSAs and RSL) and fixed-rate assets and liabilities (FRAs and FRLs); the rate of return and cost rates on the accounts are also given:
Assets | Amount (million $) | Liabilities & Equity | Amount (million $) | ||||||||
RSAs @ 4.25% | $ | 322 | RSLs @ 3.11% | $ | 200 | ||||||
FRAs @ 5.15% | $ | 700 | FRLs @ 4.95% | $ | 800 | ||||||
NEA | $ | 120 | Equity | $ | 142 | ||||||
Total | $ | 1,142 | Total | $ | 1,142 | ||||||
Suppose the institution wishes to fully hedge the interest rate risk with a swap. A swap is available with whatever notional principal is needed that pays fixed at 4.95 percent and pays variable at LIBOR. LIBOR is currently 5.11 percent. By how much would profits change right now if the bank engages in the swap?
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$202,600
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$202,600
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$300,000
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$195,200
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$195,200
Please Explain how to get the answer in the most simple terms possible.
Thank you
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