1. Snowman Bank, N.A., has a portfolio of loans and securities expected to generate cash inflows for the bank as follows:

Expected Cash Inflows of Principal and Interest Payments	Annual Period in Which Cash Receipts Are Expected
$1,100,000	Current year
750,000	Two years from today
350,000	Three years from today
62,000	Four years from today
10,000	Five years from today

Deposits and money market borrowings are expected to require the following cash outflows:

Expected Cash Outflows of Principal and Interest Payments	Annual Period during Which Cash Payments Must Be Made
$1,300,000	Current year
800,000	Two years from today
123,000	Three years from today
10,000	Four years from today
5,000	Five years from today

If the discount rate applicable to the previous cash flows is 3 percent, what is the duration of the Snowmans portfolio of earning assets and of its deposits and money market borrowings? What will happen to the bank's total returns, assuming all other factors are held constant, if interest rates rise? If interest rates fall? Given the size of the duration gap you have calculated, in what type of hedging should Snowman engage? Please be specific about the hedging transactions needed and their expected effects.