An FI has assets of $150 million, liabilities of $135 million, and equity of $15 million. The duration of the assets is 6 years and the duration of the liabilities is 4 years. The current market interest rates are 10 percent. The FI predicts that interest rates would rise in the near future and wishes to hedge its balance sheet using one-year futures contracts. The futures contracts currently have a price quote of $96 per $100 face value for three-year bonds underlying the futures contracts. The minimum contract size of one futures contract is $1 million. The duration of the three-year bonds is 2.5 years.

a. Explain whether the FI should go short or long on the futures contracts to establish a correct macrohedging.

b. Assuming no basis risk, how many contracts are necessary for the FI to fully hedge its balance sheet?

c. Assuming no basis risk and after one year, market interest rates increase by 1 percent, show that the FI is fully hedged.

d. An FI with a negative leverage-adjusted duration gap is exposed to interest rate declines and could hedge its interest rate risk by buying futures contracts. Briefly explain whether this statement is correct or not.