Total assets: $150 million Duration gap: 2.20 years Primary holdings of concern: $7 million in 6% Canada bonds selling at par that will mature in 5 years $12 million in stocks with an average beta of 0.90
1. If you expect interest rates to rise, what type of hedge should you set up, long or short? 2. How many itures contracts are needed to set up a complete hedge? 3. If interest rates on Canada bonds rise by 1%, what would be the change in the value of the bank's a. Canada bonds? b. Canada bond futures contracts? 4. If the bank can set up $150 million in futures contracts whose underlying bonds have an average duration of 2.20 years, what would be the change in the value of the bank's a. Market value of net worth (without the futures contracts)? b. Macro hedge position? c. Market value of net worth (including the effects of the xtures contracts)? 5. If the bank cannot nd a set of ltures contracts with the same duration as the bank (2.20 years) but has found enough contracts with a duration of 4.40 years, a. How much of this contract would the bank sell? b. For a 1% increase in interest rates, what would be the percentage change in the price of the futures contract? 0. What would be the decline in the market value of the bank's net worth without the futures contract in place? d. What would be the change in the market value of the bank's net worth with the futures contract in place? 6. How could basis risk result in eliminating the forecasted success of the hedge positions described previously? 7. Identify the generally accepted accounting principles that would inuence your decision to use hedging strategies. 8. If on January 5 you see June S&P 500 Index contracts selling for 800, how many contracts must the bank sell to immunize its portfolio against systematic (market) risk? 9. If the S&P 500 falls by 10% between January 5 and June, what will be the change in a. The market value of the bank's stocks? b. The market value of the bank's index contracts described in Question 8? c. The market value of the rm's net worth? 10. Explain how the bank would make use of forward contracts to hedge foreign exchange rate risk if they anticipate an increase in the value of the dollar relative to a foreign currency over the next six months
