A bank holds the following assets:AssetAmount $MillionsDuration30-Year Fixed Mortgages802515-Year Floating Mortgages401C&I Loans205Cash100The bank has $140 Million in liabilities, which carry a duration of 3.Meanwhile, the T-Bond futures contract is currently trading at a quoted price of $103. Itsduration is 8.5.If the bank wants to completely hedge its interest rate exposure, then should it go long orshort the futures contract? How many contracts?Comment: Recall that T-Bond futures contracts represent par $100,000 underlying.

To determine how the bank should hedge its interest rate exposure, we need to:Calculate the duration…

Answered: A bank holds the following assets:…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 9P

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Question

A bank holds the following assets:
Asset
Amount $Millions
Duration
30-Year Fixed Mortgages
80
25
15-Year Floating Mortgages
40
1
C&I Loans
20
5
Cash
10
0
The bank has $140 Million in liabilities, which carry a duration of 3.
Meanwhile, the T-Bond futures contract is currently trading at a quoted price of $103. Its
duration is 8.5.
If the bank wants to completely hedge its interest rate exposure, then should it go long or
short the futures contract? How many contracts?
Comment: Recall that T-Bond futures contracts represent par $100,000 underlying.

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