- Use the following to answer questions a) f). Bank of Big Bucks (5 million) Assets: Liabilities and Net Worth: 270 day Treasury bills $500m 1 year Certificates of Deposit $550m 2 year consumer loans Demand Deposits $750m Fixed rate, 12% p.a. annually $275m 2 year Int'l Bonds $175m 7 year commercial loans $350m Fixed rate, 7.5% p.a. annually Fixed rate, 9% p.a. annually Overnight borrowing $350m 10 year fixed rate mortgages S675m Fixed rate, 6.5% p.a. annually 10 year floating rate mortgages $125m Equity $100m LIBOR+50bp, monthly roll date Notes: The I vear Certificates of Deposit pay 1.95% pa, annually and will be rolled over at maturity. The 7 year commercial loans have a duration of 5.486 years. The fixed rate mortgages have a duration of 7.656 years. All values are market values and are trading at Assumption: 30 days per month; 90 days per quarter; 360 days per year. par. Notes: The 1 year Certificates of Deposit pay 1.95% p.a. annually and will be rolled over at maturity. The year commercial loans have a duration of 5.486 years. The fixed rate mortgages have a duration of 7.656 years. All values are market values and are trading at Assumption: 30 days per month: 90 days per quarter, 360 days per year. par. What is the bank's duration gap? a. -0.49 years b. +4.24 years c. -0.94 years d. -2.81 years c. +3.69 years b) What is the bank's interest rate risk exposure (c. exposed to rising or falling rates)? c) d) What is the on-balance-sheet impact on the bank if all interest rates increase 25 basis points? is suppose AR/(1+R) is equal to an increase of 25 basis points.) Suppose you are a risk manager of the bank. Construct an appropriate swap hedge for your bank. i). Specify whether your bank should be a fixed- or variable-rate payer in the swap, and ii). Calculate the notional of swap, Ns, for a perfect hedge. Suppose the fixed side of the swap has a duration of 12 years, while the variable side of the swap is basis points? Ci.c, suppose AR/(1+R) is equal to an increase of 25 basis points.) Suppose you are a risk manager of the bank. Construct an appropriate swap hedge for your bank. i). Specify whether your bank should be a fixed- or variable-rate payer in the swap, and ii). Calculate the notional of swap, Ns, for a perfect hedge. Suppose the fixed side of the swap has a duration of 12 years, while the variable side of the swap is floating on a biennial base. 1 44 e) How would you use futures contracts on Canada Bond to hedge your bank's interest rate risk exposure? Specify whether your bank should conduct a long or short hedge. Justify your strategy How would you use pur option contracts to hedge the interest rate risk exposure of your bank? That is, should the bank buy or sell put options on Canada Bond? D) - Use the following to answer questions a) f). Bank of Big Bucks (5 million) Assets: Liabilities and Net Worth: 270 day Treasury bills $500m 1 year Certificates of Deposit $550m 2 year consumer loans Demand Deposits $750m Fixed rate, 12% p.a. annually $275m 2 year Int'l Bonds $175m 7 year commercial loans $350m Fixed rate, 7.5% p.a. annually Fixed rate, 9% p.a. annually Overnight borrowing $350m 10 year fixed rate mortgages S675m Fixed rate, 6.5% p.a. annually 10 year floating rate mortgages $125m Equity $100m LIBOR+50bp, monthly roll date Notes: The I vear Certificates of Deposit pay 1.95% pa, annually and will be rolled over at maturity. The 7 year commercial loans have a duration of 5.486 years. The fixed rate mortgages have a duration of 7.656 years. All values are market values and are trading at Assumption: 30 days per month; 90 days per quarter; 360 days per year. par. Notes: The 1 year Certificates of Deposit pay 1.95% p.a. annually and will be rolled over at maturity. The year commercial loans have a duration of 5.486 years. The fixed rate mortgages have a duration of 7.656 years. All values are market values and are trading at Assumption: 30 days per month: 90 days per quarter, 360 days per year. par. What is the bank's duration gap? a. -0.49 years b. +4.24 years c. -0.94 years d. -2.81 years c. +3.69 years b) What is the bank's interest rate risk exposure (c. exposed to rising or falling rates)? c) d) What is the on-balance-sheet impact on the bank if all interest rates increase 25 basis points? is suppose AR/(1+R) is equal to an increase of 25 basis points.) Suppose you are a risk manager of the bank. Construct an appropriate swap hedge for your bank. i). Specify whether your bank should be a fixed- or variable-rate payer in the swap, and ii). Calculate the notional of swap, Ns, for a perfect hedge. Suppose the fixed side of the swap has a duration of 12 years, while the variable side of the swap is basis points? Ci.c, suppose AR/(1+R) is equal to an increase of 25 basis points.) Suppose you are a risk manager of the bank. Construct an appropriate swap hedge for your bank. i). Specify whether your bank should be a fixed- or variable-rate payer in the swap, and ii). Calculate the notional of swap, Ns, for a perfect hedge. Suppose the fixed side of the swap has a duration of 12 years, while the variable side of the swap is floating on a biennial base. 1 44 e) How would you use futures contracts on Canada Bond to hedge your bank's interest rate risk exposure? Specify whether your bank should conduct a long or short hedge. Justify your strategy How would you use pur option contracts to hedge the interest rate risk exposure of your bank? That is, should the bank buy or sell put options on Canada Bond? D)
