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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

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

Required:

a) What is the average duration of all the assets?

b) What is the average duration of all the liabilities?

c) What is the leverage adjusted duration gap?

d) What is the interest rate risk exposure of this bank? Explain why.

e) 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]]?

f) 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.

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