A bank with a leverage-adjusted duration gap of 2 years and total assets of $100 million uses a futures contract whose underlying's duration is 5 years and has a price of $100,000 to hedge its exposure.The number of contracts needed is:

Question

Quizplus · Accepted Answer

The formula to calculate the number of contracts needed is:
Number of contracts = (Total assets * leverage-adjusted duration gap) / (Futures price * underlying's duration)
Plugging in the given values:
Number of contracts = ($100,000,000 * 2) / ($100,000 * 5)
Number of contracts = 4,000
Therefore, the bank needs 4,000 futures contracts to hedge its exposure. Choice B) is the correct answer.

A Bank with a Leverage-Adjusted Duration Gap of 2 Years