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QUESTION 3 a. The market values of liabilities and assets are RM115 and RM125, respectively for OFFSHORE bank. The average duration of this bank's assets is 1.55, whereas liability's duration is 0.90. Calculate the duration gap for OFFSHORE bank. b. Based on the calculation of duration gap in the previous questions (i.e., a), what is the change in the market value of net worth as a percentage of assets if interest rates rise from 9% to 11%. c. If DEFI involves in interest-rate forward contracts with GUMTREE, how do you complete this contract to hedge interest rate risk? The value of the contract is RM2 million in face value and offers 4.5% coupon rate. The treasury bond (i.e. financial instrument) has maturity until 2035.

QUESTION 3 a. The market values of liabilities and assets are RM115 and RM125, respectively for OFFSHORE bank. The average duration of this bank's assets is 1.55, whereas liability's duration is 0.90. Calculate the duration gap for OFFSHORE bank. b. Based on the calculation of duration gap in the previous questions (i.e., a), what is the change in the market value of net worth as a percentage of assets if interest rates rise from 9% to 11%. c. If DEFI involves in interest-rate forward contracts with GUMTREE, how do you complete this contract to hedge interest rate risk? The value of the contract is RM2 million in face value and offers 4.5% coupon rate. The treasury bond (i.e. financial instrument) has maturity until 2035.

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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QUESTION 3 a. The market values of liabilities and assets are RM115 and RM125, respectively for OFFSHORE bank. The average duration of this bank's assets is 1.55, whereas liability's duration is 0.90. Calculate the duration gap for OFFSHORE bank. b. Based on the calculation of duration gap in the previous questions (i.e., a), what is the change in the market value of net worth as a percentage of assets if interest rates rise from 9% to 11%. c. If DEFI involves in interest-rate forward contracts with GUMTREE, how do you complete this contract to hedge interest rate risk? The value of the contract is RM2 million in face value and offers 4.5% coupon rate. The treasury bond (i.e. financial instrument) has maturity until 2035.
Transcribed Image Text:QUESTION 3 a. The market values of liabilities and assets are RM115 and RM125, respectively for OFFSHORE bank. The average duration of this bank's assets is 1.55, whereas liability's duration is 0.90. Calculate the duration gap for OFFSHORE bank. b. Based on the calculation of duration gap in the previous questions (i.e., a), what is the change in the market value of net worth as a percentage of assets if interest rates rise from 9% to 11%. c. If DEFI involves in interest-rate forward contracts with GUMTREE, how do you complete this contract to hedge interest rate risk? The value of the contract is RM2 million in face value and offers 4.5% coupon rate. The treasury bond (i.e. financial instrument) has maturity until 2035.
d. ANT wishes to involve in an interest rate swap with BAIDU. ANT wishes to hedge its fixed rate debt (8%), whereas BAIDU wishes to hedge its variable rate debt (T-bill+1%). The amount of debt is RM1.5 million and has 11 years of maturity. Show the steps of interest-rate swap payments. Describe the purpose of hedging with interest-rate swaps.
Transcribed Image Text:d. ANT wishes to involve in an interest rate swap with BAIDU. ANT wishes to hedge its fixed rate debt (8%), whereas BAIDU wishes to hedge its variable rate debt (T-bill+1%). The amount of debt is RM1.5 million and has 11 years of maturity. Show the steps of interest-rate swap payments. Describe the purpose of hedging with interest-rate swaps.
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