A Bank Wishes to Reduce Its Duration Gap from 1

question 62

Essay

A bank wishes to reduce its duration gap from 1.2 years to zero by using put options. The bank has $800 million in assets. The underlying bonds on the puts are valued at $115,000 and have a duration of four years. The put options have a delta of 0.58. How many put options are needed? Assume that there is no basis risk on the hedge.

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Definitions:

Capital Intensity Ratio

A financial metric that measures the amount of capital needed per unit of output or the capital required to generate a dollar of revenue.

Operating Capacity

The maximum output that a company can produce under normal conditions.

Equity Multiplier

A financial leverage ratio that measures the portion of a company's assets that are financed by shareholder's equity.

Sustainable Growth Rate

The maximum rate at which a company can grow its sales, earnings, and dividends without increasing its financial leverage or debt proportion.