A bank has $105 billion of assets with average duration of 5 years and $80 billion of liabilities with average duration of 6 years. Conduct a duration analysis for the bank, and show what will happen to the net worth of the bank if interest rates fall by 1%. What action should the bank take to reduce interest rate risk?
A bank has $80 billion of fixed-rate liabilities, $25 billion of rate-sensitive liabilities, $10 billion of fixed-rate assets, and $95 billion of rate-sensitive assets. Conduct a gap analysis for the bank, and show what will happen to the bank profits if interest rates fall by 1%. What action should the bank take to reduce interest rate risk?
If the central bank conducts an unusually large open market purchase of bonds of $1.4 trillion following a sharp contraction in the economy, what is the impact on the money supply?
If the central bank conducts the same policy as in part (b), except chartered banks hold all of these proceeds as excess reserves rather than loan them out, what happens to the amount of excess reserves, the excess reserve ratio, the money supply, and the money multiplier?
Following the financial crisis in 2008, the Federal Reserve injected massive amounts of liquidity in the U.S. banking system but very little lending occurred. As a result, the M1 money multiplier was below 1 for most of the time from October 2008 through 2011. How does this relate to your answer to part (c) above?
3.Describe the large value transfer system (LVTS), and list the major reasons for adopting the system.
Discuss how in the LVTS environment, government deposit shifting is affected by auctions of government balances.
7.Suppose that the pension you are managing is expecting an inflow of funds of $1 billion next year and you want to make sure you will earn the current interest rate of 5% when you invest the incoming funds in long-term bonds.
a.How would you use the options market to do this?
b.How would you use the futures market to do this?
What are the advantages and disadvantages of using a futures contract rather than an option contract?
8.Complete all three parts of this question.
a.Why does a lower exercise price mean a call option will have a higher premium and a put option a lower premium?
b.Suppose you buy a put option on a $1 million Canada bond futures contract with an exercise price of 100 and the price of the Canada bond is 110 at expiration.
(i) Is the contract in the money, out of the money, or at the money?
(ii) What is your profit or loss on the contract if the premium was $50,000?
Suppose you buy a call option on a $1 million Canada bond futures contract with an exercise price of 150 for a premium of $20,000. If on expiration the futures contract has a price of 155, what is your profit or loss on the contract?