NUS Business School
AY 20092010
Nan Li
Class Assignment 2
Due on Friday, March 26 in class
1.
Consider the following balance sheet (in thousands) for an FI:
Assets
Liabilities
Duration = 10 years
$950
Duration = 2 years
$860
Equity
90
a.
What is the FI's duration gap and What is the FI's interest rate risk exposure?
b.
How can the FI use futures and forward contracts to put on a macrohedge?
c.
What is the impact on the FI's equity value if the relative change in interest rates
is an increase of 1 percent?
That is,
Δ
R/(1+R) = 0.01.
d.
Suppose that the FI in part (c) macrohedges using Treasury bond futures that are
currently priced at 96. What is the impact on the FI's futures position if the
relative change in all interest rates is an increase of 1 percent? That is,
Δ
R/(1+R)
= 0.01. Assume that the deliverable Treasury bond has a duration of nine years.
e.
If the FI wants a perfect macrohedge, how many Treasury bond futures
contracts does it need?
f.
What is meant by br = 0.90? What information does this provide on the number
of futures contracts needed to construct a perfect macrohedge?
2.
An FI has a $100 million portfolio of sixyear Eurodollar bonds that have an 8
percent coupon. The bonds are trading at par and have a duration of five years. The FI
wishes to hedge the portfolio with Tbond options that have a delta of 0.625. The
underlying longterm Treasury bonds for the option have a duration of 10.1 years and
trade at a market value of $96,157 per $100,000 of par value. Each put option has a
premium of $3.25.
a.
How many bond put options are necessary to hedge the bond portfolio?
b.
If interest rates increase 100 basis points, what is the expected gain or loss on
the put option hedge?
c.
What is the expected change in market value on the bond portfolio?
d.
What is the total cost of placing the hedge?
e.
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 Spring '10
 nanli
 Interest Rates, NUS BUSINESS SCHOOL, Bank Management AY, School Nan Li

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