Homework Answers
Adjusted duration Gap = DA - [DL*(TL/TA)]
DA = Duration of Assets = 2
DL = Duration of Liabilities = 10
TA= Total Assets = $ 150 million
TL = Total Liabilities = $135 million
Adjusted duration Gap = 2 -[10*(135/150)]
= 2 - 9 = -7
So, Row Banks has a negative adjusted duration gap.
A Long position in T-bond futures should be used to hedge the interest rate risk.
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