Suppose a Bank Has an Asset Duration of 5 Years

question 38

Multiple Choice

Suppose a bank has an asset duration of 5 years and a liability duration of 2.5 years. This bank has $1,000 million in assets and $750 million in liabilities. They plan on hedging with a Treasury bond futures contract which has an underlying 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) 3,714 contracts
• B) 3,125 contracts
• C) 2,971 contracts
• D) 371 contracts
• E) 37 contacts

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