Reference no: EM132661329

Suppose that ABC Bank has the following assets, liabilities and equity: Assets (in Million $)

Cash $40

One-year mortgages (currently 10% annually): $100 (duration: 1 year)

5-year fixed-rate loans (7% annually): $360 (duration: 6.2 years)

Liabilities and Equity (in Million $)

1-year term deposits (currently 6% annually): $160 (duration: 1 year)

3-year term fixed-rate deposits (7% annually): $300 (duration: 2.7 years)

Equity: $40

Required:

Problem a. What will ABC Bank's net interest income be at the end of the first year?

Problem b. What will net interest income be at the end of the second year if interest rates rise by 2 per cent?

Problem c. Using the repricing gap model, what will ABC Bank's net interest income be for a 2 percent increase in interest rates (maturity bucket = 1 year)?

Problem d. What are the duration of the assets portfolio and duration of the liabilities portfolio?

Problem e. What is the leverage-adjusted duration gap?

Problem f. What is ABC Bank's interest rate risk exposure? Explain why.

Problem g. Should ABC bank go short or long on the futures contracts to establish the correct macrohedge for its interest rate risk? Explain why.

Problem h. Calculate the impact of 200b.p. increase in interest rates on the bank's net worth using the duration gap model.

Problem i. Propose a possible adjustment of duration gap that makes ABC bank immunize against interest rate risk.