Question

In: Finance

7.3 Part D Bank Balance Sheet Item Amount &n

7.3 Part D

Bank Balance Sheet

Item Amount Duration Interest Rate

Cash-type Securities $50m 1.2 year 2.25%

Commercial Loans $100m 2.4 years 4.50%

Mortgages $350m 8.0 years 6.50%

Core Deposits $270m 1.0 year 2.00%

Notes Payable $180m 2.0 years 4.50%

3. Off-Balance sheet futures hedge (Use balance sheet information above, 8 points)

T-Bond futures contracts for the delivery of $100,000 face value are trading at 102-16, and have a duration of 9.50 years.

a. What is the total dollar price of each futures contract (P_F)?

b. For this bank to achieve complete immunization, solve for F (total dollar value of futures contracts to immunize). Note: We don’t know the number of contracts yet or a specific interest rate change, so that information should not be used to solve for the dollar value F. Use only the information provided above to solve for F.

c. Using F from part b above, solve for the number of T-Bond futures contracts needed by this bank to hedge the interest rate risk (round to the nearest whole number of contracts).

Answers A-C below

The contract size for Treasury future is usually $100,000. Each contract trades in handles of $1,000,

but these handles are split into thirty-seconds, or increments of $31.25 ($1,000/32)

a)$ Price of Futures Contract = $102.5

b)$ Value of futures Contract = $100000+$2000+($1000*16/32) = $102500

c) 1000 Future Contracts

Please assist with D below

D. Explain in a full essay what risk this bank faces, what position this bank would take on the T-Bond futures contracts to hedge against the interest rate risk it faces, why it would take that position, and graph that position in a fully-labeled futures payoff diagram.

Expert Solution

Risk Bank Faces: Interest rate Risk

Reason:

The price of an interest rate future moves inversely to the change in interest rates. If interest rates go down, the price of the interest rate future goes up and vice-versa.

Position to be taken:

Traders who have positions in long-term financial instruments that are sensitive to interest-rate changes can take offsetting, or hedged, positions using T-Bond futures. Because of the low margin requirements, a futures trader can hedge a $100,000 bond position for only $4,000 or less, which makes hedging very easy and cost-effective.

A hedger would sell a futures contract to offset interest-rate risk on bonds in his portfolio.

If interest rates rise, the price drop of his bond portfolio would be offset by a gain in the value of his short position in T-Bond futures contracts.

A hedge can be removed at any time: the long position can sell the T-Bond futures contract to close the position, and the short position can buy back the contract to retire it.

jeff jeffy answered 2 years ago

7.3 - Appendix Bank Balance Sheet (Note: Use this information for all three problems) Item ...

7.3 - Appendix Bank Balance Sheet (Note: Use this information for all three problems) Item Amount Duration Interest Rate Cash-type Securities $50m 1.2 year 2.25% Commercial Loans $100m 2.4 years 4.50% Mortgages $350m 8.0 years 6.50% Core Deposits $270m 1.0 year 2.00% Notes Payable $180m 2.0 years 4.50% 3. Off-Balance sheet futures hedge (Use balance sheet information above, 8 points) T-Bond futures contracts for the delivery of $100,000 face value...

Bank Balance Sheet (Note: Use this information for all three problems) Item Amount &nb

Bank Balance Sheet (Note: Use this information for all three problems) Item Amount Duration Interest Rate Cash-type Securities $50m 1.2 year 2.25% Commercial Loans $100m 2.4 years 4.50% Mortgages $350m 8.0 years 6.50% Core Deposits $270m 1.0 year 2.00% Notes Payable $180m 2.0 years 4.50% 2. On-Balance Sheet Immunization Analysis (Use balance sheet information above, 6 points) Immunization formulas: 1) Setting DA x A = DL x L will immunize...

You have the following balance sheet and income statement information for Epic Corp.: Line item Amount...

You have the following balance sheet and income statement information for Epic Corp.: Line item Amount Accounts receivable (A/R) $1,760 Inventory $3,960 Accounts payable (A/P) $960 Sales $6,600 Cost of goods sold $5,280 All sales and purchases were on credit. 1. What is the firm's inventory period (in days)? 2. What is its average collection period (receivables period) (in days)? 3. What is its account payable period (in days)? 4. How long is the operating cycle (in days)? 5. How...

Bank A Balance Sheet Assets &nbsp

Bank A Balance Sheet Assets Liabilities Reserves $60 million Deposits $600 million Loans $640 million Capital $100 million Bank B Balance Sheet Assets Liabilities Reserves $90 million Deposits $600 million Loans $610 million Capital $100 million Assume the Required Reserve Ratio is 10% as mandated by the Fed. Both banks are free to keep required reserves in accordance with their respective bank policies. If both banks suffer a $10 million deposit outflow, which bank is in a better shape now, Bank A or Bank B? Why? Explain your answer by showing and usingboth banks’...

A(n) __ is a simplified balance sheet. asset account T - account bank account _ has...

A(n) ______ is a simplified balance sheet. asset account T - account bank account _____ has the key advantage that it is readily understood by the public and is highly transparent. The reserve rule Inflation targeting Prime rate targeting Discount rate targeting The interest rate the Fed charges other banks for loans is the ______ rate and the interest rate on over night loans from one bank to another bank is the ______ rate. federal funds; discount reverse repo; repo...

Consider the balance sheet for the Georgia bank as presented below. Georgia Bank Balance Sheet Assets...

Consider the balance sheet for the Georgia bank as presented below. Georgia Bank Balance Sheet Assets Liabilities Government securities $1,600 Checking accounts $4,000 Required Reserves $400 Net Worth $1,000 Excess Reserves $0 Loans $3,000 Total Assets $5,000 Total Liabilities $5,000 Using a required reserve ratio of 10% and if the bank keeps no excess reserves, write the changes to the balance sheet for each of the following scenarios: Steve withdraws $200 from his checking account. The Fed buys $2,000 in...

Consider the balance sheet for the Wahoo bank as presented below. Wahoo Bank Balance Sheet Assets...

Consider the balance sheet for the Wahoo bank as presented below. Wahoo Bank Balance Sheet Assets Liabilities government securities $1,600 Liabilities: Checking accounts $4,000 Required Reserves $400 Net Worth $1,000 Excess Reserves $0 Loans $3,000 Total Assets $5,000 Total Liabilities $5,000 Using a required reserve ratio of 10% and assuming that the bank keeps no excess reserves, write the changes to the balance sheet for each of the following scenarios: Bennett withdraws $500 from his checking account. The Fed buys...

Question 21 What is the Duration Gap for the bank balance sheet shown below? Assets Amount...

Question 21 What is the Duration Gap for the bank balance sheet shown below? Assets Amount Duration Liabilities and Equity Amount Duration Cash 80 0.00 Non-interest deposits 150 0.00 Securities 300 4.00 NOW checking 150 1.50 Loans, net 570 5.00 MMDA 300 0.25 Fed funds sold 0 CDs 170 2.00 Non-earning assets 50 Fed Funds purchased 150 0.00 $1,000 Equity 80 $1,000 A. 3.41 years B. 4.05 years C. 3.35 years D. 5.25 years E. 0.70 years

Question 18 What is the Duration Gap for the bank balance sheet shown below? Assets Amount...

Question 18 What is the Duration Gap for the bank balance sheet shown below? Assets Amount Duration Liabilities and Equity Amount Duration Cash 80 0.00 Non-interest deposits 100 0.00 Securities 270 4.25 NOW checking 170 1.00 Loans, net 600 4.75 MMDA 330 0.25 Fed funds sold 0 CDs 160 1.75 Non-earning assets 50 Fed Funds purchased 150 0.00 $1,000 Equity 90 $1,000 A. 3.9975 years B. 3.465 years C. 6.00 years D. 0.5852 years E. 3.41 years

Estimate the duration of Deposit N Bank Balance Sheet Cash = $ 50 Loan M (7%,...

Estimate the duration of Deposit N Bank Balance Sheet Cash = $ 50 Loan M (7%, 6 years) = $200 Deposit N (3 years, 2%) = $ 200 Equity = $ 50 Total Assets = $250 Total Liabilities = $ 250 1.94 2.94 3.94 4.94