Class_Assignment_2 - FIN3117 Bank Management AY 2009-2010...

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NUS Business School AY 2009-2010 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 six-year 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 T-bond options that have a delta of -0.625. The underlying long-term 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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Class_Assignment_2 - FIN3117 Bank Management AY 2009-2010...

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