1. Assume the duration of Ironbank's asset is 4.5 years; convexity of the assets is 90; the

duration ofIron bank's liabilities is 5 years; convexity of the liabilities is 70. The currentinterest rate is 9%. Calculate the change in equity value if the interest rate increases by 1% usingsimple durationmodel. Calculate the change in equity value if the interest rate increases by 1% usingduration and convexitymodel. Can the bank immunise against any interest rate risk base onduration and convexitymodel? (9 marks)

2.Now, assume the duration ofIron bank's asset is 6 years; convexity of the assets is 90;the duration ofIron bank's liabilities is 5 years; convexity of the liabilities is 70. The current interest rate is 9%. We don't know the exact movement of the interest rate. But we are certain that interest rate will decrease. Can the bank immunise against the expected interest rate risk base onduration and convexitymodel? (5 marks)

Exhibit 1.2: Balance Sheet of the Iron Bank

Balance sheet of the Iron Bank of Braavos (in 1,000 Gold Dragons)

Asset

Loan to the Iron Throne/Crown Loan to the great masters in Essos Personal Loans

Total Assets

Liabilities

6,000 Deposits from wealthy houses 10,000 Deposits from common folks 34,000

Equity

50,000Total Liabilities and Equity

40,000 5,000

5,000 50,000

Note: one major source of income for great masters in Essos is slave trade in the fictional TV show.