Financial Risk Management

1. Consider the following balance sheet for ABC Savings, Inc. (in millions):

Assets Liabilities and Equity Floating-rate mortgages 1-year time deposits (currently 10% annually) $50 (currently 6% annually) $70 30-year fixed-rate loans 3-year time deposits (currently 7% annually) $50 (currently 7% annually) $20 Equity $10 Total assets $100 Total liabilities & equity $100

a. What is ABCs expected net interest income at year-end?

b. What is net interest income at year-end if interest rates rise by 2%?

c. Using the cumulative repricing gap model, what is the expected net interest income for a 2 percent increase in interest rates?

d. What will net interest income be at year-end if interest rates on RSAs increase by 2 percent but interest rates on RSLs increase by 1 percent? Is it reasonable for changes in interest rates on RSAs and RSLs to differ? Why?