A Bank Wishes to Reduce Its Duration Gap from 1

question 19

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 4 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:

Probability of Success

The likelihood of achieving a favorable outcome in a given trial or experiment.

Binomial Random Variable

A type of random variable that takes on one of two possible outcomes with certain probabilities, typically used in binomial distributions.

Final Exam Week

The last period in an academic term during which final exams are administered across various courses, typically a significant determinant of final grades.

Expected Number

The statistically predicted count or quantity that arises in a specific context, often used in probabilistic and statistical analyses.