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You are in charge of the Asset/Liability management of Raad Bank. The current balance sheet of the bank show the following accounts:
Assets = $1,000,000 Liabilities = $800,000
Equity = $200,000
The equity has a duration of 21 years. The duration of assets (DA) is equal to one and a half time the duration of liabilities (DL). Both assets and liabilities have a Kd of 10 percent per year.
a. What will be the change in the value of equity when interest rates increases by 40 basis points?
Because equity is exposed to a significant amount of risk, Raad wants to establish situation, where he desires to put a maximum to the change in the value of equity when interest rates change. He would like the value of equity to change only by 3 percent when the interest rate increases by 50 basis points.
How can you establish situation if you cannot change the original duration of Liabilities. (The duration of assets does not necessarily remain one and a half times the duration of liabilities).
Finance is about Gunns Ltd, a company in dealing with forestry products in Australia. The company has also been listed in Australian Stock Exchange. As many companies producing forestry products, even Gunns Ltd is facing various problems. Due to the ..
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