Answer the simple finance related question. Disregard writing on page. 5. (6 poi

Question

Answer the simple finance related question. Disregard writing on page.
5. (6 points) A bank has $95 million of assets with duration of 10 years, and liabilities worth $86 million with duration of 2 years. Since the bank is concerned about preserving the value of its equity in event of an increase in interest rates, it is contemplating a macrohedge w contracts. Right now, there are plenty of T-bond futures in the market, with duration of 4 years, trading at 96-12 (i.e., $96,375). Assume that the spot and futures interest rates move together. the ith interest rate futures The duration gap (DGAP) of the bank is Workout To hedge the risk, the number of futures contract to enter is Workout: Is the hedging position to long or to short futures? Workout

Explanation / Answer

Duration gap = duration of asset - (MVL)/(MVA) ×duration of liability

= 10 - 86/95 ×2

= 8.18947 yrs

No. Of futures = 95 million / 96375

= 986

Hedging position is a short one

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