Question
Consider the following balance sheet (in millions) for an FI: Assets Liabilities Duration = 10 years $950 Duration = 2 years $860 Equity 90 a)What
Consider the following balance sheet (in millions) for an FI:
Assets Liabilities
Duration = 10 years $950 Duration = 2 years $860
Equity 90
a)What is the FI's duration gap?
b)What is the FI's interest rate risk exposure?
c)How can the FI use futures and forward contracts to put on a macrohedge?
d) What is the impact on the FI's equity value if the relative change in interest rates is an increase of 1 percent? That is, DR/(1+R) = 0.01.
e)Suppose that the FI in part (c) macrohedges using Treasury bond futures that are currently priced at 96. What is the impact on the FI's futures position if the relative change in all interest rates is an increase of 1 percent? That is, DR/(1+R) = 0.01. Assume that the deliverable Treasury bond has a duration of nine years.
f)If the FI wants a perfect macrohedge, how many government bond futures contracts does it need?
g)How does consideration of basis risk change your answers?
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