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Exam 20: Risk Management in Financial Institutions

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Question 1

Multiple Choice

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Suppose a T-Bond futures contract has a duration of 9 years and has a current market price of $98,750. Market interest rates are 6 percent today but are expected to rise to 7.5 percent. What is the change in this futures contract's market price from this change in interest rates?

A) +$12,577
B) -$12,577
C) +$62,883
D) -$62,883
E) -$33,578

F) None of the above
G) B) and E)

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B

Question 2

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A bank with a positive interest-sensitive gap will have a decrease in net interest income when interest rates in the market:

A) Rise
B) Unchange
C) Fall
D) A bank with a positive interest-sensitive gap will never have a decrease in net interest income

E) C) and D)
F) A) and D)

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Question 3

Multiple Choice

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The gain or loss to a bank from the use of a financial futures contract depends upon:

DCB bank has an assets size $1,200 million, with duration D_A = 2.5 years, D_L = 0.80 years. In addition, the total liability is $1,104 million. According to the duration gap model, what size interest rate change would make the institution insolvent if rates are currently 5%?

If interest rates increase 100 basis points the predicted dollar change in equity value will equal

Suppose a bank has an asset duration of 5 years and a liability duration of 2.5 years. This bank has $1000 million in assets and $750 million in liabilities. They are planning on trading in a Treasury bond future which has a duration of 8.5 years and which is selling right now for $99,000 for a $100,000 contract. How many futures contracts does this bank need to fully hedge itself against interest rate risk?

The average durations and dollar amounts of assets and liabilities held in Freedom Bank are shown as the below: What is the weighted average duration of Freedom Bank's asset portfolio? What is the weighted average duration of Freedom Bank's liability portfolio? What is the leverage-adjusted duration gap?

One of the most popular methods of neutralizing duration gap risks is to buy and sell financial futures contracts.

If a bank has a positive repricing gap, falling interest rates increase profitability.

The number of futures contracts that a bank will need in order to fully hedge the bank's overall interest rate risk exposure and protect the bank's net worth depends upon (among other factors) :

A macro hedge is a

A bond has a face value of $1,000 and five years to maturity. This bond has a coupon rate of 13 percent and is selling in the market today for $902. Coupon payments are made annually on this bond. What is the yield to maturity (YTM) for this bond?

Microhedging is to use risk-management instruments such as futures and options to reduce the interest rate risk of banks.

If all interest rates on the two sides of balance sheet decline by 65 basis points, when other things are equal, what is the change in net interest income for Formosa Independence Bank over the year?

Please calculate the 10-day Value-at-Risk (VaR) for this 2-million USD portfolio.

In the typical quality swap a borrower with a negative duration gap is more likely to pay all or part of the other swap party's long-term interest rate.

A bank has an average asset duration of 1.15 years and an average liability duration of 2.70 years. This bank has $250 million in total assets and $225 million in total liabilities. This bank has:

Swaps are usually the best hedging tool to use to hedge short term risks in a half year or less.

A bank has an average asset duration of 5 years and an average liability duration of 3 years. This bank has total assets of $500 million and total liabilities of $250 million. Currently, market interest rates are 10 percent. If interest rates fall to 8 percent, what is this bank's change in net worth?

A bank has Federal funds totaling $25 million with an interest rate sensitivity weight of 1.0. This bank also has loans of $105 million and investments of $65 million with interest rate sensitivity weights of 1.40 and 1.15 respectively. This bank also has $135 million in interest-bearing deposits with an interest rate sensitivity weight of 0.90 and other money market borrowings of $75 million with an interest rate sensitivity weight of 1.0. What is the weighted interest-sensitive gap for this bank?