Exposure against rising interest rates

Assignment Help Financial Management

Reference no: EM131915028

An FI has a $300 million asset portfolio that has an average duration of 8.1 years. The average duration of its $260 million in liabilities is 4.1 years. Assets and liabilities are yielding 8 percent. The FI uses put options on T-bonds to hedge against unexpected interest rate increases. The average delta (δ) of the put options has been estimated at −0.3 and the average duration of the T-bonds is 8.6 years. The current market value of the T-bonds is $91,000. Put options on T-bonds are selling at a premium of $1.15 per face value of $100.

a. What is the modified duration of the T-bonds if the current level of interest rates is 8 percent? (Do not round intermediate calculations. Round your answer to 4 decimal places. (e.g., 32.1616))

Modified duration years

b. How many put option contracts should the FI purchase to hedge its exposure against rising interest rates? The face value of the T-bonds is $100,000. (Do not round intermediate calculations. Round your answer to the nearest whole number.)

Number of contracts

c. If interest rates increase 50 basis points, what will be the change in value of the equity of the FI? (Enter your answer in dollars not in millions. Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to the nearest dollar amount.)

Change in equity value $

d. If interest rates increase 50 basis point, what will be the change in value of the T-bond option hedge position? (Enter your answer in dollars not in millions. Do not round intermediate calculations. Round your answer to the nearest dollar amount.)

Change in T-bond value $

e. What must be the change in interest rates before the change in value of the balance sheet (equity) will offset the cost of placing the hedge? (Do not round intermediate calculations. Negative value should be indicated by a minus sign. Round your answer to 2 decimal places. (e.g., 32.16))

Change in interest rates %

f. How much must interest rates change before the payoff of the hedge will exactly cover the cost of placing the hedge? (Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16))

Change in interest rates %

Reference no: EM131915028

Questions Cloud

Assume the margin is expressed as markup based on cost : Assume the margin is expressed as a markup based on cost. Compute your answer to the nearest penny.

What is market-to-book ratio-dividends per share : What are earnings per share? What are dividends per share? what is the market-to-book ratio?

Calculate the npv and irr based on weighted average cost : Calculate the NPV and IRR based on weighted average cost of capital method,

Foreign exchange exposure using the forward market : What is the net spread earned for six months on this investment if the bank covers its foreign exchange exposure using the forward market?

Exposure against rising interest rates : How many put option contracts should the FI purchase to hedge its exposure against rising interest rates?

What is the company net income and company roa : What is the company's net income? What is the company's ROA?

What is the quick ratio-what is the current ratio : What is the current ratio? What is the quick ratio?

Plot trends in the firm ratios again the industry averages : Calculate the key financial ratios for Seal-Best, Inc. and plot trends in the firm's ratios agains the industry averages.

What is its cost of common equity and wacc : The last dividend was D0 = $2.50, and it is expected to grow at a 8% constant rate. What is its cost of common equity and its WACC?

User Account

All Pages