A Bank Has Assets of $500,000,000 and Equity of $40,000,000

question 38

Multiple Choice

A bank has assets of $500,000,000 and equity of $40,000,000. The assets have an average duration of 5.5 years, and the liabilities have an average duration of 2.5 years. An 8-year fixed-rate T-bond with the same coupon as the fixed-rate on the swap has a duration of 6 years, and the duration of a floating-rate bond that reprices annually is one year. The bank wishes to hedge its balance sheet with swap contracts that have notional contracts of $100,000. What is the optimal number of swap contracts into which the bank should enter?

• A)2,500 contracts.
• B)2,760 contracts.
• C)13,800 contracts.
• D)3,200 contracts.
• E)None of the abovE.

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Definitions:

Chewing Reflex

An involuntary movement of the jaw that occurs in response to the presence of food in the mouth, aiding in mechanical digestion.

Oral Cavity

The mouth, an opening in the body equipped with teeth, tongue, and salivary glands, serving as the beginning of the digestive tract.

Neural Tube

The embryonic precursor to the central nervous system, which comprises the brain and spinal cord. The neural tube forms early in the development of vertebrates.

Subarachnoid Space

The area between the arachnoid mater and pia mater, filled with cerebrospinal fluid, which acts as a protective cushion for the brain and spinal cord.