Bank A has assets of $150 million, liabilities of $135 million, and equity of $15 million. The asset duration is six yea
Posted: Sun Jun 05, 2022 7:32 am
Bank A 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. Bank A wishes to hedge the balance sheet with
futures contracts, which currently have a price quote of $96 per
$100 face value ($ 1.000.000) for the benchmark three-month CD
underlying the contract. The current rate on three-month CDs is 4,0
percent and the duration of these contracts is 0,25 years.
a. Should the bank go short or
long on the futures contracts to establish the correct
macrohedge?
b. Assuming no basis risk, how
many contracts are necessary to fully hedge the bank?
c. Verify that the change in the
futures position will offset the change in the cash balance sheet
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 bond futures contracts that had a market value of $95 per
$100 of face value ($ 100.000), a yield of 8,5295 percent, and a
duration of 10,3725 years, how many futures contracts would have
been necessary to fully hedge the balance sheet? Assume no basis
risk.
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. Bank A wishes to hedge the balance sheet with
futures contracts, which currently have a price quote of $96 per
$100 face value ($ 1.000.000) for the benchmark three-month CD
underlying the contract. The current rate on three-month CDs is 4,0
percent and the duration of these contracts is 0,25 years.
a. Should the bank go short or
long on the futures contracts to establish the correct
macrohedge?
b. Assuming no basis risk, how
many contracts are necessary to fully hedge the bank?
c. Verify that the change in the
futures position will offset the change in the cash balance sheet
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 bond futures contracts that had a market value of $95 per
$100 of face value ($ 100.000), a yield of 8,5295 percent, and a
duration of 10,3725 years, how many futures contracts would have
been necessary to fully hedge the balance sheet? Assume no basis
risk.