The Average Duration of the Loans Is 10 Years -What Is the Number of T-Bill Futures Contracts Necessary to Average

question 34

Multiple Choice

The average duration of the loans is 10 years. The average duration of the deposits is 3 years. $$\begin{array} { | l | r | l | r | } \hline \text { Consumer loans } & \$ 50 \text { million } & \text { Deposits } & \$ 235 \text { million } \\\hline \text { Commercial Loans } & \$ 200 \text { million } & \text { Equity } & \$ 15 \text { million } \\\hline \text { Total Assets } & \$ 250 \text { million } & \text { Total Liabilities \& Equity } & \$ 250 \text { million } \\\hline\end{array}$$
-What is the number of T-Bill futures contracts necessary to hedge the balance sheet if the duration of the deliverable T-bills is 0.25 years and the current price of the futures contract is $98 per $100 face value?

• A)6,212 contracts.
• B)6,805 contracts.
• C)6,900 contracts.
• D)7,112 contracts.
• E)7,327 contracts.

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Definitions:

Quid Pro Quo

An agreement between two parties where something is given in exchange for something else.

Greenmail

A strategy where a company buys back its own shares from a potential acquirer at a price higher than the market value to avoid a takeover.

Asset Allocation

The process of spreading investments among different classes of assets, such as stocks, bonds, and cash to manage risk and achieve investment goals.

Portfolio Construction

The process of selecting the appropriate mix of investments and allocating assets among those investments to achieve specific investment goals.