Suppose you are the manager of the bank that has 15 million


Suppose you are the manager of the bank that has $15 million of fixed-rate assets, $30 million of interest rate- sensitive assets, $20 million of rate-fixed liabilities and $20 million of interest rate -sensitive liabilities.

a. Is the bank rate sensitivity gap positive or negative? Explain why

b. What is the size of this bank rate gap?

c. If the short-term interest rates rise by 5 percent by what amount will the bank profit increase or decrease?

d. What action should the bank take to reduce the interest-rate risk? Explain

e. If the short-term interest rates fall by 5 percent, by what amount will the bank profit increase or decrease?

f. What action should the bank take to reduce the interest-rate risk? Explain

g. If you consider interest rate swaps to hedge interest-rate risk, given your balance sheet, how would you trade interest payments? Explain

h. A bank that expects interest rates to increase in the future will want to hold more of rate -sensitive assets and fewer rate- sensitive liabilities True or false i. When bank lends long and borrows short, an increase in the interest rates will drive down the bank’s profits. True or false

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Business Economics: Suppose you are the manager of the bank that has 15 million
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