A bank with total assets of $271 million and equity of $31 million has a leverage adjusted duration gap of +0.21 years.Use the following quotation from the Wall Street Journal to construct an at-the-money futures option hedge of the bank's duration gap position. $$\begin{array}{l}
\text { TREASURY BILLS (IMM)-\$1 million; 91-day (\$25.28 ea.) }\
\begin{array} { | c | c | c | }
\hline \text { Strike Price } & \text { Calls-Settle } & \text { Puts-Settle } \
\hline 96.00 & 28 \text { basis points } & 63 \text { basis points } \
\hline 96.25 & 19 \text { basis points } & 78 \text { basis points } \
\hline 96.50 & 12 \text { basis points } & 96 \text { basis points } \
\hline
\end{array}
\end{array}$$ If 91-day Treasury bill rates increase from 3.75 percent to 4.75 percent, what will be the profit/loss per contract on the bank's futures option hedge?

Question

A bank with total assets of $271 million and equity of $31 million has a leverage adjusted duration gap of +0.21 years.Use the following quotation from the Wall Street Journal to construct an at-the-money futures option hedge of the bank's duration gap position. $$\begin{array}{l}
\text { TREASURY BILLS (IMM)-\$1 million; 91-day (\$25.28 ea.) }\
\begin{array} { | c | c | c | } 
\hline \text { Strike Price } & \text { Calls-Settle } & \text { Puts-Settle } \
\hline 96.00 & 28 \text { basis points } & 63 \text { basis points } \
\hline 96.25 & 19 \text { basis points } & 78 \text { basis points } \
\hline 96.50 & 12 \text { basis points } & 96 \text { basis points } \
\hline
\end{array}
\end{array}$$ If 91-day Treasury bill rates increase from 3.75 percent to 4.75 percent, what will be the profit/loss per contract on the bank's futures option hedge?

Quizplus · Accepted Answer

The bank would profit from the put option as interest rates increase, causing the value of the underlying Treasury bills to decrease. The put option allows the bank to sell the Treasury bills at the strike price, which would be higher than the market price after the rate increase.

A Bank with Total Assets of $271 Million and Equity