Reference no: EM131315817
Assume that you manage the interest rate risk position for your bank. Your bank currently has a positive cumulative GAP for all time intervals through one year. You expect that interest rates will fall sharply during the year and want to reduce your bank's risk position. The current yield curve is inverted with long-term rates below short-term rates.
a. To reduce risk, would you recommend issuing a three-month time deposit and investing the proceeds in one-year T-bills? Will you profit if rate fall during the year.
b. To reduce risk, would you recommend issuing a three-month time deposit and making a two-year commercial loan priced at prime plus 1 percent? Why?
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: Suppose that your bank buys a T-bill yielding 4 percent that matures in six months and finances the purchase with a three-month time deposit paying 3 percent. The purchase prince of the T-bill is $3 million financed with a $3 million deposit. Calcula..
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