The Average Duration of the Loans Is 10 Years

question 175

Multiple Choice

The average duration of the loans is 10 years. The average duration of the deposits is 3 years. What is the number of T-bond futures contracts necessary to hedge the balance sheet if the duration of the deliverable bonds is 9 years and the current price of the futures contract is $96 per $100 face value and if basis risk shows that for every 1 percent shock to interest rates, i.e., ΔR/(1 + R) = 0.01, the implied rate on the deliverable bonds in the futures market increases by 1.1 percent, i.e., ΔR_f/(1 + R_f) = 0.011?

• A)1,500 contracts.
• B)1,888 contracts.
• C)2,100 contracts.
• D)2,408 contracts.
• E)3,100 contracts.

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Definitions:

Cystic Fibrosis

A genetic disease affecting the lungs and digestive system, characterized by thick, sticky mucus leading to infections and digestion problems.

Mucus Thickens

A condition where the mucus becomes more viscous, often leading to congestion and difficulty in breathing or clearing passages.

Meconium Ileus

A blockage of the small intestines caused by thick, sticky meconium in newborn babies, often associated with cystic fibrosis.

Cystic Fibrosis

A genetic disorder that affects the lungs, pancreas, and other organs, leading to thick sticky mucus production, which causes respiratory and digestive problems.