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Problem: Assume that B1C has the balance sheet: Assets Liabilities/Equity Floating 70 50...

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Finance

Problem: Assume that B1C has the balance sheet:

Assets Liabilities/Equity

Floating 70 50

Fixed 20 30

Other 10 12

Equity 8

100 100

1. Is B1C asset sensitive or liability sensitive? Illustrate this with the above example.

2. Does asset sensitive mean DA>DL or conversely? Illustrate with the above example (assume Fixed A/L have durations are 3, Float A/L durations are 0.5 and Other A/L have durations are 0).

3. What strategic options does B1C have to eliminate the sensitivity in 1? Consider both changes to their business mix, as well as borrowings and trades in the asset market.

4. Assuming float assets and liabilities are indexed to Prime, how could an interest rate swap be used to neutralize the sensitivity in 1? What else is needed to make this work?

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