The Average Duration of the Loans Is 10 Years -What Is the Gain or Loss on the Futures Position

question 11

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 gain or loss on the futures position using T-Bonds (Duration = 9 years, $96 per $100 face value) if the shock to interest rates is 1 percent [i.e. ?R/(1 + R) = 0.01 and ?R_f/(1 + R_f) = 0.011]?

• A)$16,320,960 loss.
• B)$16,312,320 gain.
• C)$15,552,750 gain.
• D)$15,552,750 loss.
• E)$13,252,250 gain.

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Definitions:

Weighted Average

A calculation that takes into account the varying degrees of importance of the numbers in a dataset, assigning weights to each number based on its significance.

Weighted Average

A computation that considers the different levels of significance of the figures in a collection of data, giving greater emphasis to certain numbers over others.

FIFO

An inventory valuation method that assumes the first items purchased are the first items sold, standing for First-In, First-Out.

LIFO

Last In, First Out, an inventory valuation method where the most recently produced or acquired items are recorded as sold first.