A Bank with Total Assets of $271 Million and Equity

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.