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:

Randomized Block Experiment

A design of experiment in which subjects are blocked into groups to control for variability, and then randomly assigned to treatments within each block.

Multiple Comparison Methods

Multiple comparison methods are statistical procedures used to evaluate differences among three or more group means while controlling for the probability of making type I errors.

Fisher's LSD Procedure

A statistical method used for comparing means when the null hypothesis has been rejected in an ANOVA test, standing for Least Significant Difference.

ANOVA

Stands for Analysis of Variance, a statistical method used to determine the existence of significant differences between the means of three or more independent groups.