On January 4, 2018, an FI has the following balance sheet (rates = 8 percent)

Assets Liabilities/Equity A 450m DA = 8 years L 396m DL = 4 years E 54m

Duration Gap = [8 (396/450)4] = 4.48 years > 0 The FI manager thinks rates will increase by 0.55 percent in the next three months. If this happens, the equity value will change by:

The FI manager will hedge this interest rate risk with either futures contracts, option contracts, or swap contracts.

If the FI uses futures, it will select June T-bonds to hedge. The duration on the T-bonds underlying the contract is 14.5 years and the T-bond futures are selling at a price of $110.53125 per $100, or $110,531.25. T-bond futures rates, currently 5 percent, are expected to increase by 0.75 percent over the next three months.

If the FI uses options, it will buy puts on 15-year T-bonds futures with a June maturity, an exercise price of 109, and an option premium of percent. The spot price on the T-bond underlying the option is $115.78125 per $100 of face value. The duration on the T-bonds underlying the options is 14.5 years and the delta of the put options is -0.85. Managers expect these T-bond rates to increase by 0.7 percent from 5.25 percent in the next three months.

If the FI uses swaps, a swap agent offers a swap involving DFixed = 8 years (based on the 15-year Treasury bond rate) and DFloating = 1 year (based on Treasury bills).

If by April 4, 2018, balance sheet rates increase by 0.5 percent, futures rates by 0.7 percent, and T-bond rates underlying the option contracts by 0.66 percent, calculate the on- and off-balance-sheet cash flows to the FI when using futures contracts, option contracts, and swap contracts as its hedge instrument. Which alternative is the best?