Tree Row Bank has assets of $150 million, liabilities of $135 million, and equity of $15 million. The asset duration is six years and the duration of the liabilities is four years. Market interest rates are 10 percent. Tree Row Bank wishes to hedge the balance sheet with Treasury bond futures contracts, which currently have a price quote of $95 per $100 face value for the benchmark 20-year, 8 percent coupon bond underlying the contract, a market yield of 8.5295 percent, and a duration of 10.3725 years. (LG 24-2, LG 24-3) d. If the bank had hedged with Treasury bill futures contracts that had a market value of $98 per $100 of face value and a duration of 0.25 year, how many futures contracts would have been necessary to fully hedge the balance sheet? e. What additional issues should be considered by the bank in choosing between T-bond or T-bill futures contracts?
Tree Row Bank has assets of $150 million, liabilities of $135 million, and equity of $15 million. The asset duration is six years and the duration of the liabilities is four years. Market interest rates are 10 percent. Tree Row Bank wishes to hedge the balance sheet with Treasury bond futures contracts, which currently have a price quote of $95 per $100 face value for the benchmark 20-year, 8 percent coupon bond underlying the contract, a market yield of 8.5295 percent, and a duration of 10.3725 years. (LG 24-2, LG 24-3) d. If the bank had hedged with Treasury bill futures contracts that had a market value of $98 per $100 of face value and a duration of 0.25 year, how many futures contracts would have been necessary to fully hedge the balance sheet? e. What additional issues should be considered by the bank in choosing between T-bond or T-bill futures contracts?
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
Problem 1PS
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Tree Row Bank has assets of $150 million, liabilities of $135 million, and equity of $15 million. The asset duration is six years and the duration of the liabilities is four years. Market interest rates are 10 percent. Tree Row Bank wishes to hedge the balance sheet with Treasury bond futures contracts, which currently have a price quote of $95 per $100 face value for the benchmark 20-year, 8 percent coupon bond underlying the contract, a market yield of 8.5295 percent, and a duration of 10.3725 years. (LG 24-2, LG 24-3)
| d. If the bank had hedged with Treasury bill futures contracts that had a market value of $98 per $100 of face value and a duration of 0.25 year, how many futures contracts would have been necessary to fully hedge the balance sheet? |
| e. What additional issues should be considered by the bank in choosing between T-bond or T-bill futures contracts? |
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