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Suppose Bank A has $25 million in rate-sensitive assets, $80 million in fixed rate assets, $80 million in rate sensitive liabilities, and $25 million in

Suppose Bank A has $25 million in rate-sensitive assets, $80 million in fixed rate assets, $80 million in rate sensitive liabilities, and $25 million in fixed rate liabilities and equity capital.

a. What is the value of Bank As GAP?

b. Calculate the change in Bank As profit as a result of a decrease in market interest rates of 2 percentage points.

c. Calculate the change in Bank As profit as a result of an increase in market interest rates of 3 percentage points.

d. If you had believed that rates were going to rise by 2 percentage points (before it actually happened), explain how (if at all) you could have altered Bank As balance sheet and changed its interest rate risk exposure to improve its subsequent profit performance.

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