A bank with total assets of $271 million and equity of $31 million has a leverage adjusted duration gap of +0.21 years.One-year maturity notes are currently priced at par and are paying 4.5 percent annually.Two-year maturity notes are currently priced at par and are paying 5 percent annually.The terms of a swap of $100 million notional value of liabilities' payments are 4.95 percent annual fixed payments in exchange for floating rate payments tied to the annual discount yield. What are the expected end-of-year profits or losses if the bank hedges its interest rate risk exposure using the swap?
A) The bank expects to lose $0.45 million in the first year and earn $0.58 million in the second year by buying the swap to hedge against interest rate increases.
B) The bank expects to lose $0.45 million in the first year and earn $0.58 million in the second year by selling the swap to hedge against interest rate decreases.
C) The bank expects to earn $0.45 million in the first year, lose $0.58 million in the second year by buying the swap to hedge against interest rate increases.
D) The bank expects to earn $0.45 million in the first year and lose $0.58 million in the second year by selling the swap to hedge against interest rate decreases.
E) The bank will not do the swap because it has no interest rate risk exposure.
Correct Answer:
Verified
Q99: If a US bank has variable-rate assets
Q100: A thrift has funded 10 percent fixed-rate
Q101: Bank USA has fixed-rate assets of $50
Q102: Bank USA has fixed-rate assets of $50
Q103: A U.S.bank agrees to a swap of
Q104: Bank USA has fixed-rate assets of $50
Q105: A U.S.bank agrees to a swap of
Q106: A bank with total assets of $271
Q107: A U.S.bank agrees to a swap of
Q109: A U.S.bank agrees to a swap of
Unlock this Answer For Free Now!
View this answer and more for free by performing one of the following actions
Scan the QR code to install the App and get 2 free unlocks
Unlock quizzes for free by uploading documents