1. 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
2. A bank has an average asset duration of 5 years and an average liability duration of 3 years. This bank has total assets of $500 million and total liabilities of $250 million. Currently, market interest rates are 10 percent. If interest rates fall by 2 percent (to 8 percent), what is this bank's change in net worth?
A. Net worth will decrease by $31.81 million.
B. Net worth will increase by $31.81 million.
C. Net worth will increase by $27.27 million.
D. Net worth will decrease by $27.27 million.
E. Net worth will not change at all.