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