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Value at Risk (VAR) Modeling and SWAPS - Use the following information to answers questions...

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Finance

Value at Risk (VAR) Modeling and SWAPS - Use the following information to answers questions 6-10.

Titan Banks Balance Sheet

Assets $1,100

Assets have a yield-to-maturity of 5.00%

Liabilities $1,010

Liabilities have a yield-to-maturity of 2.50%

Equity $90

Titan Bank owns only two assets, $675 in a consumer loan with a duration of 2.20 years and $425 in a Treasury bond with a duration of 4.00 years. Titan Bank has the following liability schemes to choose from:

Amount Duration (years)

Scheme A Time deposit $610 3.80

Large CD 400 1.50

Scheme B Zero coupon CD $400 4.00

Time deposit 500 3.80

Large CD 110 1.50

Scheme C Zero coupon CD $200 4.00 Small time deposit 460 3.80

Large CD 350 1.50

6. What is the duration of the assets?

7. If Scheme A is used, what is the duration of the liabilities?

8. If Scheme B is used, what is the duration of the liabilities?

9. If Scheme C is used, what is the duration of the liabilities?

10. If the bank is 100 percent certain there will be an interest rate shock of +300 basis points, what scheme will maximize shareholders post-shock wealth? Explain your answer.

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