Suppose a bank has an asset duration of 5 years and a liability duration of 2.5 years.The bank has $1,000 million in assets and $750 million in liabilities.It is planning to trade in Treasury bond futures whose underlying's duration is 8.5 years and is currently selling at $99,000 for a $100,000 contract.How many futures contracts does the bank need to fully hedge itself against interest rate risk?

Question

Quizplus · Accepted Answer

The bank needs to hedge its interest rate risk by matching the duration of its assets and liabilities. The bank has an asset duration of 5 years and a liability duration of 2.5 years. The bank has $1,000 million in assets and $750 million in liabilities. The bank is planning to trade in Treasury bond futures whose underlying's duration is 8.5 years and is currently selling at $99,000 for a $100,000 contract. The bank needs to purchase 3,714 futures contracts to fully hedge itself against interest rate risk.

Suppose a Bank Has an Asset Duration of 5 Years