University Banks average asset duration is 6 years and average liability duratio

Question

University Banks average asset duration is 6 years and average liability duration is 10 years. Suppose the size of its assets is $1,000 million and its liabilities are $950 million. If R is 12% and the bank is expecting a 150 basis point decrease in interest rates, how many T-bond futures contracts are required to fully hedge the equity value if the Treasury bond futures are selling for 94.5% of $100,000 face value with duration of 4.50 years?

How many contracts are needed to offset risk on the balance sheet?

Short (sell) 8,230 contracts

Long (buy) 8,230 contracts

Short (sell) 4,250 contracts

None

Short (sell) 8,230 contracts

Long (buy) 8,230 contracts

Short (sell) 4,250 contracts

None

Explanation / Answer

Long (buy) 8,230 contracts

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