ANZ Bank has the following balance sheet (in millions):
The duration of the assets is six years and the duration of the liabilities is four years. The bank forecasts interest rates fall from 10 per cent to 9 per cent over the next year.
A Calculate the duration gap for the ANZ Bank?
B Calculate the expected change in net worth for the ANZ Bank, if the forecast is accurate?
C Calculate the effect on net worth if interest rates increase 200 basis points?
D What is the ANZ Bank’s interest rate risk exposure? Explain.
E How can the ANZ Bank use futures and forward contracts to put on a macrohedge?
F Suppose the ANZ Bank macrohedges, using Treasury bond futures, that are currently priced at $96 per $100 face value with the minimum contract size of $100,000. What is the impact on the bank’s futures position, if interest rates increase 200 basis points? Assume that the deliverable Treasury bond has a duration of six years.
G If the bank wants to macrohedge, how many Treasury bond futures contracts does it need?
H Present and analyse three (3) difficulties of applying the Duration Model in real-world situations.