Question

Consider the following balance sheet (in millions) for an FI:

Assets				Liabilities
Duration = 13 years	$	970		Duration = 5 years	$	900
				Equity		70

a. What is the FI’s duration gap? (Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16))
b. What is the FI’s interest rate risk exposure?
c. How can the FI use futures and forward contracts to create a macrohedge?
d. What is the impact on the FI’s equity value if the relative change in interest rates is an increase of 2 percent? That is, ΔΔ R/(1 + R) = 0.02. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer in dollars not in millions.)
e. Suppose that the FI in part (c) macrohedges using Treasury bond futures that are currently priced at 92. What is the change in value per futures contract used to hedge if the relative change in all interest rates is an increase of 2 percent? That is, ΔΔ R/(1 + R) = 0.02. Assume that the deliverable Treasury bond has a duration of twelve years. The bonds underlying the futures contract have a par value of $100,000. (Negative amount should be indicated by a minus sign. Enter your answer in dollars not in millions.)
f. If the FI wants to macrohedge, how many Treasury bond futures contracts does it need? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round down your answer to the nearest whole number.)

Answer 1

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