Consider the following bank balance sheet (fixed rates and pure discount securities unless indicated otherwise). Interest rates on liabilities (y_1) are 3 percent and on assets (y_A) are 6 percent. Find the duration of assets and liabilities. Will the bank benefit or be hurt if all interest rates rise? Bank management can protect itself by (buying)/(selling) Treasury bond futures contracts. Explain by considering basis risk using interest rate futures to hedge a position with a variety of assets. How can the duration gap be managed through the use of financial futures contracts based on 10-year Treasury bonds? Define your terms and state clearly your assumptions. Which asset is causing the substantial duration mismatch? Since the bank would take a capital loss if interest rates rose, what type of interest rate derivative contract would help hedge this possibility - buy a future or sell a future, and for what notional value? Delta E = -Delta y[D_A/(1 + y_A) - L/A D_L/(1 + y_L)]A If Delta E = 0: D_A/1 + y_A = L/A D_L/(1 + y_L) Delta E = change in the market value of equity, D_A = duration of assets, D_L = duration of liabilities, L = market value of liabilities, A = market value of assets, and Delta_y = change