The Average Duration of the Loans Is 10 Years Assume That the Hedge Was Placed as Indicated in a Duration

question 126

Multiple Choice

The average duration of the loans is 10 years.The average duration of the deposits is 3 years. $$\begin{array} { | l | r | l | r | } \hline \text { Consumer loans } & \$ 50 \text { million } & \text { Deposits } & \$ 235 \text { million } \\\hline \text { Commercial Loans } & \$ 200 \text { million } & \text { Equity } & \$ 15 \text { million } \\\hline \text { Total Assets } & \$ 250 \text { million } & \text { Total Liabilities \& Equity } & \$ 250 \text { million } \\\hline\end{array}$$ Assume that the hedge was placed as indicated in a prior question, and that the BP futures contract is trading at $1.62/?.Assume the futures contract has some days remaining to maturity.What will be the gain or loss on the hedge if it is unwound at this price?

• A)$4,280,000 loss.
• B)$4,000,000 loss.
• C)$4,280,000 gain.
• D)$4,000,000 gain.
• E)$6,400,000 gain.

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Definitions:

Net Present Value Method

A financial modeling technique that evaluates the profitability of an investment by discounting future cash flows to their present value and subtracting the initial investment.

Cash Flows

The total amount of money being transferred into and out of a business, often analyzed to assess the financial health of an organization.

Annual Return

The percentage of profit or loss on an investment over a one-year period.

Payback Period

The duration of time it takes to recoup the initial investment cost of a project or investment, through cash inflows or savings.