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Consider the following balance sheet (in millions) for an FI: Assets Liabilities Duration = 11 years $850 Duration = 2 years $740 Equity 110
a. What is the FI’s duration gap?
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, formula19.mmlR/(1 + R) = 0.01.
e. Suppose that the FI in part (c) macrohedges using Treasury bond futures that are currently priced at 95. 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, formula19.mmlR/(1 + R) = 0.02. Assume that the deliverable Treasury bond has a duration of nine years. The bonds underlying the futures contract have a par value of $100,000.
f. If the FI wants to macrohedge, how many Treasury bond futures contracts does it need?
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