Consider the following balance sheet (in millions) for an FI:

Assets			Liabilities
Duration = 10 year	$950		Duration = 2 years	$860
			Equity		90

1. What is the FI's (leverage-adjusted) duration gap?

2. How can the FI use futures and forward contracts to put on a macrohedge? Why?

3. 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.

4. Suppose that the FI macrohedges using Treasury bond futures that are currently priced at $96 per $100 of face value. The minimum contract size is $100,000. What is the impact on each futures position of the FI 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.

5. If the FI wants to macrohedge, how many Treasury bond futures contracts does it need?

Consider basis risk for the next three problems

6. Compute the number of futures contracts required to construct a macrohedge if [DR_f/(1+R_f) / DR/(1+R)] = br = 0.90

7. Explain what is meant by br = 0.90.

8. If br = 0.90, what information does this provide on the number of futures contracts needed to construct a macrohedge?