ch14 sol - CHAPTER 14 BANK MANAGEMENT AND PROFITABILITY 9....

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CHAPTER 14 BANK MANAGEMENT AND PROFITABILITY 9. Assume you are the manager of a bank with the balance sheet as shown below. Determine the maturity GAP and duration GAP for the bank. What will happen to the value or net income for the bank if interest rates go up or down? Maturity GAP = RSA –RSL = ($55M - $15M) = +$40M = +50% Duration GAP = D A – (MV L /MV A )(D L ) + 1.225 – (70/80)(1.472) = -0.063 An increase in interest rates will cause proportionally more downward repricing of assets than of liabilities. If interest rates increase, the bank’s net interest income and equity will decline. A decrease in interest rates will cause proportionally more upward repricing of assets than of liabilities. If interest rates decrease, the bank’s net interest income and equity will increase. 13. Explain how financial futures are used to reduce bank interest rate risk. How does the value of a futures contract change when interest rates change? If financial futures are used for interest rate hedging, the type of financial futures contract, the number of contracts, and the buy or sell decision must be made. The selection of the specific contract is related to
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ch14 sol - CHAPTER 14 BANK MANAGEMENT AND PROFITABILITY 9....

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