Which asset is causing the substantial duration mismatch? Since the bank would t

Question

Which asset is causing the substantial duration mismatch? Since the bank would take a capital loss if interest rates rose, what type of interest rate derivative contract wuld help hedge this possiblity - buy a future or sell a future, and for what notational value?

Consider the following bank balance sheet (fixed rates and pure discount securities unless indicated otherwise). Interest rates on liabilities (y) are 3 percent and on assets (ya) are 6 percent. Duration Smillions ears S150 1.5 .5 Super Now Checking Accounts (rates set daily) 6-Month Certificates of Deposit 3-Year Certificates of DepositI Total Liabilities Net Worth Total Liabilities and Net Worth Prime-Rate Loans (rates set daily) 2-Year Car Loans 30-Year Mortgages Total Assets 50 35 3.0 235 20 255 75 1.0 100 1.5 80 7.0 255

Explanation / Answer

Early repayment or this amount must have already been paid by the person who has taken the loan and remaining time which is shown is the duration of the loan or this is showing the useful life of the asset.

Short sell so same strategy for interest rate strategy would be the best as it helps the concerned person tolock in his interest rate if market is more volatile based on the events and problems.

Current price - change in value.will help you determine your notional value.

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