Fnancial institution to hedge interest exposure

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Question:

a) Brie?y explain what a negative duration gap implies regarding the direction of the sensitivity of a bank's pro?tability to interest rates. What would be the impact of a negative interest rate shock on banks equity? Explain clearly.

b) What are the two ways for a ?nancial institution to hedge interest exposure to interest rates?

c} Assuming you observe the current price 5.} of a stock being $5? and the current price of a futures contract with 3-month maturity written on the stock being Fo=$55. The risk-free interest rate r is 3%. Is there an arbitrage opportunity in the market? If yes, what is the arbitrage strategy and the respective arbitrage pro?t from this strategy?

Reference no: EM133120886

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