1. The Tidewater State Bank has $1,000 in total assets (all of which are earning assets), $700 of which will be repriced within the next 90 days. This bank also has $800 in total liabilities, $400 of which will be repriced within the next 90 days. Currently, the bank is earning 8 percent on its assets and is paying 5 percent on its liabilities. If interest rates on both assets and liabilities decrease by 2 percent in the next 90 days, what should happen to this bank's net interest margin?
A. It should fall by 2 percent.
B. It should fall by 0.6 percent.
C. It should fall by 4 percent.
D. It should fall by 1 percent.
E. It should not show any fall.
2. The Kromwell Community Bank's asset portfolio has an average duration of 6 years and its liability portfolio has an average duration of 2.5 years. The bank has $500 million in total assets and $450 million in liabilities. The Kromwell Community Bank is thinking about hedging its risk by using a Treasury Bond futures contract whose underlying's duration is 7.5 years and has a price of $98,000. How many futures contracts will it need to hedge its risk?
A. buy 2,381 contracts
B. sell 2,381 contracts
C. buy 2,551 contracts
D. sell 2,551 contracts