Question
Standard Bank has assets of $150 million, liabilities of $135 million and equity of $15 million. Its asset duration is six years and the duration
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Standard Bank has assets of $150 million, liabilities of $135 million and equity of $15 million. Its asset duration is six years and the duration of the liabilities is four years. Standard Bank wishes to hedge the balance sheet with 20-year T-bond futures contracts, which are currently trading at $95 per $100 face value and duration of 10.37 years. Note that T-bond futures are sold in $100 000 face value per contract.
To establish the correct hedge, Standard Bank should
Buy the T-bond futures as an increase in interest rates will cause the value of the banks equity to increase.
Sell the T-bond futures as an increase in interest rates will cause the value of the banks equity to increase.
Sell the T-bond futures as an increase in interest rates will cause the value of the banks equity to decrease.
Buy the T-bond futures as an increase in interest rates will cause the value of the banks equity to decrease.
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