Bank of South Texas reports an average asset duration of 9 years and an average liability duration of 4 years. In its latest financial report, the bank recorded total assets of $220 million and total liabilities of $190 million. If interest rates began at 1% and then suddenly climbed to 1.5%, what change will occur in the value of Bank of South Texas’s net worth? By how much would Bank of South Texas’s net worth change if, instead of rising, interest rates fall from 1% to 0.75%? NW decrease by -10.4 millions and NW increase by 5 millions NW decrease by -7.10 millions and NW increase by 3.5 millions NW decrease by -5.2 millions and NW increase by 1 millions NW decrease by -6.04 millions and NW increase by 3.02 millions NW decrease by -4 millions and NW increase by 2.5 millions 5. Suppose a Bank of Texas (BoT) has an average asset duration of 4 years, an average liability duration of two years, total assets of $500 million, and liabilities of $450 million at a given point in time. Suppose, too, that the firm plans to trade in Treasury bond futures contracts. The T-bonds named in the futures contracts have a duration of 10 years, and the T-bonds’ current price is $99,700 per $100,000 contract. How many futures contracts does a BoT need to cover a given size risk exposure? What is the change in net worth of BoT, if interest rate increases from 2% to 5%. As we notice that BoT have positive duration gap (indicating its assets have longer average maturity than its liabilities). What sort of hedging strategy should BoT adopt if interest rate declines? Required Futures contracts are 1103, Change in NW 550 millions , long hedge Required Futures contracts are 2005, Change in NW 700 millions , short hedge Required Futures contracts are 1000, Change in NW 905 millions , long hedge Required Futures contracts are 1553, Change in NW 100 millions , long hedge Required Futures contracts are 1300, Change in NW 50 millions , short hedge 6. Suppose investors expect a Bank of RGV to pay a $5 dividend at end of period 1, $12 at the end of period 2, and then plan to sell the stock for a price of $120 per share at the end of period 2. If the risk-adjusted discount rate is 10%, the current value of the bank’s stock should be: a. 125 200 100 500 800