HRB Bank has the following balance sheet (in millions):

Assets $150 Liabilities $135

Equity $15

Total $150 Total $150

1) In each of the following cases, identify what direction of interest rate risk the manager of HRB Bank faces (ie rising or falling interest rates).(4 marks)

(i) HRB bank plans to issue CDs in three months.

(ii) HRB plans to buy bonds in two months.

(iii) The bank plans to sell Treasury securities next month.

(iv) HRB has assets with duration of 4 years and liabilities with duration of 6 years.

(2) Assume that options are used to hedge HRB's interest rate risk. For each of the cases in Part (1), state whether the risk should be hedged by buying a put or a call option. Explain.(4 marks)

(i) HRB bank plans to issue CDs in three months.

(ii) HRB plans to buy bonds in two months.

(iii) HRB plans to sell Treasury securities next month.

(iv) HRB has assets with duration of 4 years and liabilities with duration of 6 years.