Which of the following is not true for an institution with a positive duration gap? A....
Which of the following is not true for an institution with a positive duration gap?
- A. It is hurt by increasing interest rates.
- B. It may hedge its interest rate risk by buying interest rate futures.
- C. It may hedge its interest rate risk by buying puts on interest rate futures.
- D. It may hedge its interest rate risk by paying fixed and receiving floating rate in an interest rate swap.
- E. All of the above are true.
Homework Answers
The below is not true as interest rate futures move inversely with interest rates, and we want a position where it moves in the same direction as interest rates
It may hedge its interest rate risk by buying interest rate futures.
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Which of the following is not true for an institution with a
positive duration gap?
A....
An institution that suffers from declining interest rates may hedge by _____. A. selling interest rate...
An institution that suffers from declining interest rates may hedge by _____. A. selling interest rate futures B. buying interest rate futures C. making fixed-rate payments in exchange for floating-rate payments in an interest rate swap D. making floating-rate payments in exchange for fixed-rate payments in an interest rate swap E. both (B) and (D)
An Fl with a positive duration gap could do which of the following to reduce the...
An Fl with a positive duration gap could do which of the following to reduce the duration gap? Select one: O a. None of the options O b. Engage in a swap and pay a variable rate and receive a fixed rate of interest O c. Buy bonds forward O d. Buy bond call options O e. Sell bond futures contracts
Which of the following statements are true? Select all that apply A Basis spread is the...
Which of the following statements are true? Select all that apply A Basis spread is the rate differential added to the lower of two floating rates in a swap. B The present value of floating rate payments in a swap, at initiation, is always 1. C If you are paying a fixed interest rate and receiving a stock's return in a swap, and the stock's return is negative, you have to pay more than the interest payment to the other...
Consider the following balance sheet (in millions) for an FI: Assets Duration = 13 years $...
Consider the following balance sheet (in millions) for an FI: Assets Duration = 13 years $ 970 Liabilities Duration = 5 years Equity $ 900 70 a. What is the Fl's duration gap? (Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16)) b. What is the Fl's interest rate risk exposure? c. How can the Fl use futures and forward contracts to create a macrohedge? d. What is the impact on the Fi's equity value...
4. Consider the following balance sheet (in millions) for an FI: Assets Duration = 10 years...
4.
Consider the following balance sheet (in millions) for an FI: Assets Duration = 10 years $ 910 Liabilities Duration = 4 years Equity $ 810 100 a. What is the Fl's duration gap? (Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16)) b. What is the Fl's interest rate risk exposure? c. How can the Fl use futures and forward contracts to create a macrohedge? d. What is the impact on the FI's equity...
Determine the optimal hedge ratio for Treasury bonds worth $1,000,000 with a duration of 12.45, y...
Determine the optimal hedge ratio for Treasury bonds worth $1,000,000 with a duration of 12.45, yielding 11.9 percent if the futures has a price of $90,000, a duration of 8.5 years and an implied yield of 9.5 percent. a. 16.27 b. 16.63 c. 7.42 d. 11.11 e. none of the above which of the following is the interpretation of a VAR of $5 million for one year at .05. a. the probability is .05 that the firm will lose at...
Modified duration gap of 3 year and market value of assets of 3 million. Manager expects interest rates to go up from 9% to 10%. Question: show how can the manager immunize the bank assets from intere...
Modified duration gap of 3 year and market value of assets of 3 million. Manager expects interest rates to go up from 9% to 10%. Question: show how can the manager immunize the bank assets from interest rate change by using following 2 Swaps: Swap 1: pay T-bill +1% in exchange for 7% fixed rate. Swap 2: pay fixed rate of 7% in exchange for a floating rate of T-bill +1%. Assume modified duration on 7% fixed rate security is...
Q6. A commercial bank has a very positive duration gap between assets and liabilities, and would...
Q6. A commercial bank has a very positive duration gap between assets and liabilities, and would like to invest in some mortgage-backed securities to hedge the interest rate risk. Please rank the following securities in terms of hedging benefit to the bank A. IO strip in a CMO B. PO strip in a CMO C. The most senior tranche (tranche A) in a CMO D. The residual tranche in a CMO E. The pass-through securities
“Companies with high credit risks are the ones that cannot access fixed-rate markets directly. They are...
“Companies with high credit risks are the ones that cannot access fixed-rate markets directly. They are the companies that are most likely to be paying fixed and receiving floating in an interest rate swap.” Assume that this statement is true. Do you think it increases or decreases the risk of a financial institution’s swap portfolio? Assume that companies are most likely to default when interest rates are high.
“Companies with high credit risks are the ones that cannot access fixed-rate markets directly. They are the companies th...
“Companies with high credit risks are the ones that cannot access fixed-rate markets directly. They are the companies that are most likely to be paying fixed and receiving floating in an interest rate swap.” Assume that this statement is true. Do you think it increases or decreases the risk of a financial institution’s swap portfolio? Assume that companies are most likely to default when interest rates are high.
An Fl with a positive duration gap could do which of the following to reduce the duration gap? Select one: O a. None of the options O b. Engage in a swap and pay a variable rate and receive a fixed rate of interest O c. Buy bonds forward O d. Buy bond call options O e. Sell bond futures contracts
Consider the following balance sheet (in millions) for an FI: Assets Duration = 13 years $ 970 Liabilities Duration = 5 years Equity $ 900 70 a. What is the Fl's duration gap? (Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16)) b. What is the Fl's interest rate risk exposure? c. How can the Fl use futures and forward contracts to create a macrohedge? d. What is the impact on the Fi's equity value...
4.
Consider the following balance sheet (in millions) for an FI: Assets Duration = 10 years $ 910 Liabilities Duration = 4 years Equity $ 810 100 a. What is the Fl's duration gap? (Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16)) b. What is the Fl's interest rate risk exposure? c. How can the Fl use futures and forward contracts to create a macrohedge? d. What is the impact on the FI's equity...
Q6. A commercial bank has a very positive duration gap between assets and liabilities, and would like to invest in some mortgage-backed securities to hedge the interest rate risk. Please rank the following securities in terms of hedging benefit to the bank A. IO strip in a CMO B. PO strip in a CMO C. The most senior tranche (tranche A) in a CMO D. The residual tranche in a CMO E. The pass-through securities
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