Tree Row Bank has assets of $ 150 million, liabilities of $ 135 million, and equity of

Question:

Tree Row Bank has assets of $ 150 million, liabilities of $ 135 million, and equity of $ 15 million. The asset duration is six years and the duration of the liabilities is four years. Market interest rates are 10 percent. Tree Row Bank wishes to hedge the with Treasury bond futures contracts, which currently have a price quote of $ 95 per $ 100 for the benchmark 20-year, 8 percent bond underlying the contract, a market yield of 8.5295 percent, and a duration of 10.3725 years.
a. Should the bank go short or long on the futures contracts to establish the correct macrohedge?
b. How many contracts are necessary to fully hedge the bank?
c. Verify that the change in the futures position will off-set the change in the cash position for a change in market interest rates of plus 100 basis points and minus 50 basis points.
d. If the bank had hedged with Treasury bill futures con-tracts that had a market value of $ 98 per $ 100 of and a duration of 0.25 years, how many futures contracts would have been necessary to fully hedge the
e. What additional issues should be considered by the bank in choosing between T-bond or T-bill futures contracts?

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