Question
Value at Risk (VAR) Modeling and SWAPS - Use the following information to answers question 6. Titan Banks Balance Sheet Assets $1,100 Assets have a
Value at Risk (VAR) Modeling and SWAPS - Use the following information to answers question 6.
Titan Banks Balance Sheet | |
Assets $1,100
Assets have a yield-to-maturity of 5.00% | Liabilities $1,010
Liabilities have a yield-to-maturity of 2.50% |
Equity $90 |
Titan Bank owns only two assets, $675 in a consumer loan with a duration of 2.20 years and $425 in a Treasury bond with a duration of 4.00 years. Titan Bank has the following liability schemes to choose from:
Amount Duration (years) Scheme A Time deposit $610 3.80 Large CD 400 1.50
Scheme B Zero coupon CD $400 4.00 Time deposit 500 3.80 Large CD 110 1.50
Scheme C Zero coupon CD $200 4.00 Small time deposit 460 3.80 Large CD 350 1.50 |
6a. What is the duration of the assets?
6b. If Scheme A is used, what is the duration of the liabilities?
6c. If Scheme B is used, what is the duration of the liabilities?
6d. If Scheme C is used, what is the duration of the liabilities?
6e. If the bank is 100 percent certain there will be an interest rate shock of +300 basis points, what scheme will maximize shareholders post-shock wealth? Explain your answer.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started