Suppose that you bank buys a T-bill yielding 4% that matures in 6-months and finances the purchase with a 3-month time deposit paying 3%. The purchase price of the T-bill is $3million financed with a $3 million deposit:
(a) Calculate the 6-month GAP associated with this transaction. What does this GAP measure indicated about interest rate risk in this transaction?
(b) Calculate the 3 month GAP associated with this transaction. Is this a better GAP measure of the bank’s risk? Why or why not?