Bank asset-liability management [20 marks] a) Recall class discussions on bank risk management i. You are the Managing Director of PRQ Bank. When will you adopt a policy of zero nominal gap. Illustrate. ii. Explain the conditions under which an asset-liability management strategy of RSA < RSL will be useful/meaningful? iii. Construct an example to illustrate. iv. Explain the conditions under which an asset-liability management strategy of RSL < RSA will be useful/meaningful? iv. Construct an example to illustrate. v. The Bank of Ghana has been working to reduce interest rates. Suppose you believed that they will succeed. Considering RSA, RSL, FRA and FRL, how would you today strategize your banks balance sheet? Explain your strategy. Use another example to illustrate. b. Compute the duration of the following securities which have the same term-to- maturity. The yield is 24% p.a. X. The 1st pays GHS 1,000,000 one year hence and GHS 100,000 three years hence;

The 2nd pays GHS 100,000 one year hence and GHS 1,000,000 three years hence.

c. Calculate the impact of 1 percentage point interest rate increase on the durations of the two securities which have the same maturity.