NatWest like virtually all financial institutions has as a key focus, asset and liability management. They wish to ensure that there is an adequate spread between return on assets and the cost of funds, liabilities. They are also concerned with the interest rate sensitivity of assets and liabilities as well as their respective liquidity. A key asset for NatWest is in the form of 30-year mortgages with floating interest rates that adjust on an annual basis. NatWest obtains most of its funds by issuing 5-year Certificates of Deposit. It uses the Yield Curve to assess the markets anticipation of future interest rates. It believes that expectations of future interest rates are the main driver of affecting the Yield Curve. Assume that the Yield Curve is steeply downward sloping. Based upon the information provided and your understanding of what drives their business model, please answer the following questions:

a. Why is it important to assess the sensitivity of assets and liabilities in a financial institution such as NatWest?

b. If the time-weighted value of assets is not the same as that of liabilities, in

effect, what is the financial institution doing and explain why this may or may not be OK.

c. What do we mean by Liquidity Matching and why should this be important to an

institution such as NatWest?

d. Do you think NatWest should use financial futures as a method of hedging? Why or why not.