Suppose a Bank Has an Asset Duration of 5 Years

question 15

Multiple Choice

Suppose a bank has an asset duration of 5 years and a liability duration of 2.5 years. This bank has $1000 million in assets and $750 million in liabilities. They are planning on trading in a Treasury bond future which has a duration of 8.5 years and which is selling right now for $99,000 for a $100,000 contract. How many futures contracts does this bank need to fully hedge itself against interest rate risk?

• A) 3714 contracts
• B) 3125 contracts
• C) 2971 contracts
• D) 371 contracts
• E) 37 contacts

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Definitions:

Customer Service

The assistance and advice provided by a company to those people who buy or use its products or services.

Low Wages

Compensation amounts paid to workers that are significantly below the average for their sector or region.

CEOs Paid

Refers to the compensation, including salary, bonuses, and stock options, received by chief executive officers of corporations.

Average Employee

A hypothetical or statistical worker representative of the typical skill level, salary, and experience within a company or industry.