1. Suppose that your bank buys a T-bill yielding the purchase with a three-month time deposit paying 3 percent. The purchase price of the T- bill is $5 million financed with a $5 million deposit.

Required:

i. Calculate the six-month GAP associated with this transaction. What does this GAP measure indicate about interest rate risk in this transaction?

ii. Calculate the three-month GAP associated with this transaction. Is this a better GAP measure of the bank's risk? Why or why not?