risk management

risk management

Ass 2
1.    Use the following information to answer the next seven (6) questions: (Show your work)

The numbers provided are in millions of dollars and reflect market values:
Cash        40    Deposits    historical avg. maturity = 4 years; historical average duration = 3.5 years    100
T-Bills     30 days (4.5 percent, par)    30    Certificates of Deposit    avg. maturity = 6 months; avg. duration = 6 months    150
T-Bills     91 days (5.0 percent, par)    60    Short-term Debt    avg. maturity = 4 years    250
Commercial Loans    avg. maturity = 9.0 years; avg. duration = 7.5 years    200    Long-term debt    avg. maturity = 15 years; average duration = 12 years    100
Consumer Loans    avg. maturity = 6.0 years; avg. duration = 4.0 years    300    Equity        230
Mortgage Loans – Fixed rate    avg. maturity = 30 years; avg. duration = 25 years    150
Mortgage Loans – Adjustable    avg. maturity = 30 years; interest rate reset = 6 months    20
Total Assets:    830    Total Liabilities & Equity:    830

1. The short-term debt consists of 4-year bonds paying an annual coupon of 4 percent and selling at par. What is the duration of the short-term debt?

2. What is the weighted average duration of the assets of the FI?

3. What is the weighted average duration of the liabilities of the FI?

4. What is the leverage adjusted duration gap of the FI?

5. A risk manager could restructure assets and liabilities to reduce interest rate exposure for this example by
6. What is the effect of a 200 basis point increase in interest rates on the market value of equity of the FI? Use the duration approximation relationship. Assume r = 5 percent.

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