Let assume that the average duration of the loans in a firm is 10 years. The average duration of its deposits is 3.5 years with k=L/A = 0.90 and total asset=$200 million. What is the gain or loss on the futures position (that hedges against the risk of the rise in interest rate) using T-Bonds (Duration = 9 years, $96 per $100 face value, minimum contract size = $100,000) if the shock to interest rates is 1 percent (increase) while the current interest rate is 10%?

Select one:

a.

Loss $11,318,181.18

b.

Gain $16,318,181.31

c.

Loss $11,909,090.91

d.

Gain $11,909,090.91

e.

Gain $12,454,545.45