Let assume that the average duration of the loans in a firm is 8 years. The average duration of its deposits is 3 years with k=L/A = 0.92 and total asset=$250 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.

Gain $11,318,181.18

b.

Gain $11,909,090.91

c.

Loss $16,181,181.18

d.

Gain $10,318,318.32

e.

Loss $11,318,181.18