INTEREST RATE RISK MANAGEMENT USING OFF-BALANCE SHEET INSTRUMENTS
Assessment Description – Research Case study on a Financial Institution
Austral Big Bank Limited has assets of $150 million, liabilities of $135 million
and equity of $15 million. The asset duration is six years and the duration of
liabilities is four years. Market interest rates are 10 per cent. Austral Big
Bank Limited wishes to hedge the balance sheet with 20-year T-bond futures
contract, which are currently trading at 91.4705 (a yield of 8.5295%), and so
have a price quote equivalent of $95 per $100 face value, 8 per cent coupon
on the bond underlying the contract. The price sensitivity of futures contact
to the price sensitivity of underlying bonds is br=0.90.
(a) Calculate the duration of the future position (20 years and $1000 bond).
Complete a table with all the applicable calculations. Use the following
headings: Time, Cash Flow, PV of Cash Flow, PV of Cash Flow X t.
(b) Should the bank go short or long on the futures contracts to establish the
(c) How many contracts are necessary to fully hedge the bank?
(d) Verify that the change in the futures position will offset the change in the
cash balance sheet position for a change in market interest rates of plus
100 basis points and minus 50 basis points.
(e) If the bank had edged with bank accepted bill futures contract that had
market value of $98 per $100 of face value, how many futures contracts
would be necessary to hedge fully the balance sheet? (assume the
duration of the underlying assets is 0.25 years and the face value of the
contract is $1 000 000)
(f) What additional issues should be considered by the bank in choosing
between T-bond or bank accepted bill futures contracts?
(g) How would you answer for part (c) change if the relationship of price
sensitivity of futures contracts to the price sensitivity of underlying bonds
You research essay will need to have the following structure and framework:
1. Answer all the questions completely. Provide comments, figures and calculations as
applicable. Formulae required.
2. Tables, charts, diagrams and graphs.
3. Harvard Referencing System.
The assignment has to be typed, double-spacing.
Note: Students may be subject to dishonesty review and subsequent consequences if the turnitin
similarity index is relatively high, say over 15%-20% depending on the sources of similarities.
MARKING GUIDE AND INSTRUCTIONS
Refer to the Unit Outline for instructions under Assessment Strategy and Rationale.
Read Appendix Two – Rubric Criteria
MARKING GUIDE MAXIMUM
CASE STUDY – AUSTRAL BIG BANK LIMITED
(a) 20 marks
(b) 10 marks
(c) 10 marks
(d) 20 marks
(e) 10 marks
(f) 10 marks
(g) 10 marks
Relevant tables, diagrams, charts and graphs 5 marks
Discretionary (Spelling, grammar, presentation,
TO GET THIS OR ANY OTHER ASSIGNMENT DONE FOR YOU FROM SCRATCH, PLACE A NEW ORDER HERE