banking

1. Future Bank is concerned about what an increase in interest rates will do to the value of its bond portfolio. The portfolio currently has a market value of $20 million, and the bank management intends to liquidate $5 million in bonds over the next three months to fund additional corporate loans. If interest rates increase to 8 percent, the bond will sell for $4.9 million. The management sells 20 June Treasury bond contracts at 106-005 today. Interest rates do increase, and in three months later management offsets its position by buying 20 June Treasury bond contracts at 102-315. (6 marks) a- Calculate the potential loss following an increase in interest rates. b- Calculate the potential gain following trading futures. I C- Calculate the overall return. d. To fully offset potential loss, what should the bank do? - Suppose the bank cannot trade more than 20 Treasury bond contracts. Also, assume that the selling quote is as before 106-005 but the purchasing quote not given. What should be the purchasing price (not quote) to fully hedge the potential loss? f- Explain what would happen if the expectation about interest rates does not come true and interest rates decrease? 1. Future Bank is concerned about what an increase in interest rates will do to the value of its bond portfolio. The portfolio currently has a market value of $20 million, and the bank management intends to liquidate $5 million in bonds over the next three months to fund additional corporate loans. If interest rates increase to 8 percent, the bond will sell for $4.9 million. The management sells 20 June Treasury bond contracts at 106-005 today. Interest rates do increase, and in three months later management offsets its position by buying 20 June Treasury bond contracts at 102-315. (6 marks) a- Calculate the potential loss following an increase in interest rates. b- Calculate the potential gain following trading futures. I C- Calculate the overall return. d. To fully offset potential loss, what should the bank do? - Suppose the bank cannot trade more than 20 Treasury bond contracts. Also, assume that the selling quote is as before 106-005 but the purchasing quote not given. What should be the purchasing price (not quote) to fully hedge the potential loss? f- Explain what would happen if the expectation about interest rates does not come true and interest rates decrease