Suppose that your bank buys a T-bill yielding 4% that matures in 6 moths and finances the purchase with a 3 month time deposit paying 3%. Te purchase price of the T-bill is $3million financed with $3million deposit.
a. Calculate the six-month GAP associated with this transaction. What does GAP measure indicate about interest rate risk in this transaction?
b. Calculate the 3-month GAP associated with this transaction. Is this better GAP measure of the bank's risk? Why? Why not?