HRB Bank has the following balance sheet (in millions): Assets $150 Liabilities $135 Equity $15 Total $150 Total $150 The duration of the assets is six years and the duration of the liabilities is four years. The bank is expecting interest rates to fall from 10 per cent to 9 per cent over the next year. (a) What is the leverage-adjusted duration gap for HRB Bank? (4 marks) (b) What is the expected change in net worth (in $m) for HRB Bank if the interest rate forecast is accurate? (4 marks) (c) What will be the effect on net worth (in $m) if interest rates increase 200 basis points? (4 marks) (d) 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. (e) Assume that options are used to hedge HRB's interest rate risk. For each of the cases in Part (d), 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. HRB Bank has the following balance sheet (in millions): Assets $150 Liabilities $135 Equity $15 Total $150 Total $150 The duration of the assets is six years and the duration of the liabilities is four years. The bank is expecting interest rates to fall from 10 per cent to 9 per cent over the next year. (a) What is the leverage-adjusted duration gap for HRB Bank? (4 marks) (b) What is the expected change in net worth (in $m) for HRB Bank if the interest rate forecast is accurate? (4 marks) (c) What will be the effect on net worth (in $m) if interest rates increase 200 basis points? (4 marks) (d) 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. (e) Assume that options are used to hedge HRB's interest rate risk. For each of the cases in Part (d), 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
