Consider the following balance sheet (in millions) for anFI:
Assets Liabilities
Duration = 10 years $950 Duration = 2 years $860
Equity 90
a)What is the FI's duration gap?
b)What is the FI's interest rate risk exposure?
c)How can the FI use futures and forward contracts to put on amacrohedge?
d) What is the impact on the FI's equity value if the relativechange in interest rates is an increase of 1 percent? That is,DR/(1+R) = 0.01.
e)Suppose that the FI in part (c) macrohedges using Treasurybond futures that are currently priced at 96. What is the impact onthe FI's futures position if the relative change in all interestrates is an increase of 1 percent? That is, DR/(1+R) = 0.01. Assumethat the deliverable Treasury bond has a duration of nineyears.
f)If the FI wants a perfect macrohedge, how many government bondfutures contracts does it need?
g)How does consideration of basis risk change your answers?
