The following balance sheet information is available (amounts in thousands of dollars and duration in years) for a financial institution:

Amount Duration

Assets:

T-notes 60 0.85

T-bonds 170 4.00

Loans 2,724 7.00

Liabilities and Equity:

Deposits 2,092 1.00

Federal funds 232 0.01

Equity 630

a/ What is the interest rate risk exposure of this bank? Explain why. (5 marks)

b/ What is the forecasted impact on the market value of equity caused by a relative upward shift in the entire yield curve of 0.5 percent [i.e., DeltaR/(1+R) = 0.01]]? (5 marks)

c/ If this bank uses forward contract to hedge this interest rate risk, should the bank take a short or long position on this forward contract? Explain why. (10 marks)

d/ If this bank uses swap contract to hedge this interest rate risk, should the bank be a swap buyer or a swap seller? Explain why. (10 marks)