Better Buy Bank has assets of $225 million and liabilities of $180 million. The
ID: 2700231 • Letter: B
Question
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.
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
326 contracts
400 contracts
550 contracts
615 contracts
Explanation / Answer
400 contracts
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