Problembetter buy bank has assets of 225 million and, Ask an Expert

Accounting

Problem:

Better Buy Bank has assets of $225 million and liabilities of $180 million. The asset duration is 5 years and the duration of the liabilities is 4 years. Market interest rates are 10 percent.This wishes to hedge the balance sheet with Treasury bond futures contracts, which currently have a price quote of $96.75 per $100 face value for the benchmark 20-year market yield of 6.985 percent, and duration of 13.50 years.

Required:

Question: How many contracts are necessary to fully hedge the bank if the relationship of the price sensitivity of futures contracts to the price sensitivity of underlying bonds were br = 0.95?

326 contracts
400 contracts
550 contracts
615 contracts

Note: Provide support for your underlying principle.

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Accounting Basics, Accounting

Category:- Accounting Basics
Reference No.:- M91170576

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