Reference no: EM13859852
ANZ Bank has the following balance sheet (in millions):
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Assets
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$500
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Liabilities
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$400
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Equity
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$100
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Total
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$500
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Total
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$500
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The duration of the assets is six years and the duration of the liabilities is four years. The bank forecasts interest rates fall from 10 per cent to 9 per cent over the next year.
A. Calculate the duration gap for the ANZ Bank?
B. Calculate the expected change in net worth for the ANZ Bank, if the forecast is accurate?
C. Calculate the effect on net worth if interest rates increase 200 basis points?
D. What is the ANZ Bank's interest rate risk exposure? Explain.
E. How can the ANZ Bank use futures and forward contracts to put on a macrohedge?
F. Suppose the ANZ Bank macrohedges, using Treasury bond futures, that are currently priced at $96 per $100 face value with the minimum contract size of $100,000. What is the impact on the bank's futures position, if interest rates increase 200 basis points? Assume that the deliverable Treasury bond has a duration of six years.
G. If the bank wants to macrohedge, how many Treasury bond futures contracts does it need?
H. Present and analyse three (3) difficulties of applying the Duration Model in real-world situations.
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