Chapter8: Analysis Of Risk And Return
Section: Chapter Questions
Problem 9P
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Question
A bank has assets of $500,000,000 and equity of $40,000,000. The assets have an average duration of 5.5 years, and the liabilities have an average duration of 2.5 years. An 8-year fixed-rate T-bond with the same coupon as the fixed-rate on the swap has a duration of 6 years, and the duration of a floating-rate bond that reprices annually is one year. The bank wishes to hedge its balance sheet with swap contracts that have notional contracts of $100,000. What is the optimal number of swap contracts into which the bank should enter?
2,500 contracts. |
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2,760 contracts. |
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13,800 contracts. |
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3,200 contracts. |
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None of the above. |
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