1. Suppose a bank has an asset size of 1000 TL and liability of 900 (TL) and hence an equity of 100 TL. Further suppose that this banks TL asset duration (modified) is 5 years and liability duration is 1 years.

a.) What happens to this banks equity if the interest rates increase by 100 basis points. (every other thing is assumed constant), what happens if the interest rates decrease by 100 basis points.

b.) What will be the threshold interest rate shock for this bank to default (i.e. the equity turns into 0)

c.) What type of interest rate swap (IRS) can this bank utilize to hedge its interest rate risk? (i.e receive or pay fixed or float,its modified duration assuming the notional amount is 1000)

d.) Suppose the spot interest rates are 5%,6%,7%,8%,9% (for 1^st,2^nd,3^rd,4^th and 5^th years) what will be the resulting forward rates derived from these spot rates?

e.) what will be the fair swap rate i.e fixed rate applicable for this swap? what will be the value of the swap at the first day of investment.

f.) calculate the fair value of the above irs swap when, the spot rates increase of 200 basis point for all maturities next day after the swap deal was signed.

g.) what would be the balance sheet effect of this shock for the bank? How much of the interest rate shock can be compensated with the swap invested?