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Current income gap / futures contracts

9. Following financial statement is for the current year. From the past, you know that 10% of fixed-rate mortgages prepay each year. You also estimate that 10% of checkable deposits and 20% of savings accounts are rate sensitive.

Second National Bank
Assets Liabilities
Reserves $1,500,000 Checkable deposits $15,000,000
Securities Money market
< 1 year $6,000,000 deposits $5,500,000
1 to 2 years $8,000,000 Savings accounts $8,000,000
> 2 years $12,000,000 CD's
Residential Mortgages Variable rate $15,000,000
Variable rate $7,000,000 < 1 year $22,000,000
Fixed rate $13,000,000 1 to 2 years $5,000,000
Commercial loans > 2 years $2,500,000
< 1 year $1,500,000 Federal funds $5,000,000
1 to 2 years $18,500,000 Borrowings
>2 years $30,000,000 < 1 year $12,000,000
Buildings, Etc. $2,500,000 1 to 2 years $3,000,000
> 2 years $2,000,000
Bank capital $5,000,000
Total $100,000,000 Total $100,000,000

What is the current income gap for Second National Bank? What will happen to the bank's current net interest income if rates fall by 75 basis points?

2. If the portfolio you manage is holding $25 million of 6s of 2029 Treasury bonds with a price of 110, what forward contract would you enter into to hedge the interest-rate risk on these bonds over the coming year?

3. If at the expiration date, the deliverable Treasury bond is selling for 101 but the Treasury bond futures contract is selling for 102, what will happen to the futures price? Explain your answer?

7. If you buy a put option on a $100,000 Treasury bond futures contract with an exercise price of 95 and the price of the Treasury bond is 120 at expiration, is the contract in the money, out of the money, or at the money? What is your profit or loss on the contract if the premium was $4,000?

Solution Summary

The solution explains how to calculate the current income gap and impact on futures contracts

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