Suppose that your bank buys a T- bill yielding 4 percent that matures in six months and finances the purchase with a three month time deposit paying 3 percent. The purchase price of the T- bill is $ 3 million financed with a $ 3 million deposit.
a. Calculate the six month GAP associated with this transaction. What does this GAP measure indicate about interest rate risk in this transaction?
b. Calculate the three month GAP associated with this transaction. Is this a better GAP measure of the bank’s risk? Why or why not?