180 Mishkin/Eakins • Financial Markets and Institutions, Seventh Edition
Chapter 23 Mini-Case
1. (Using assumptions in the chapter example):
a. 29 = 4 + 9 + (20% of 15) +13)
3. a. The income on assets declines by 0.03 × $29 million = $0.87 million. The payments on the
4. a. 0.31%
5. a. –26.4
b. –12.2
6. Calculate the weighted duration of each asset and liability.
Assets (Your Firm)
Asset Amount Duration Amount × Duration Weighted Duration
3 0 0 0.000
3 1.6 4.8 0.032
7 5 35 0.233
15 5.5 82.5 0.550
Solutions to Online Mini-Cases 181
Liabilities (Your Firm)
Amount Duration Amount
× Duration Weighted Duration
10 1 10 0.069
10 0 0 0.000
9 1.2 10.8 0.074
145 1.477
Assets (Your Competition)
Asset Amount Duration Amount × DurationWeighted Duration
4 0 0 0.000
5 0.3 1.5 0.010
21 0.9 18.9 0.126
Liabilities (Your Competition)
Amount Duration Amount
× Duration Weighted Duration
14 1 14 0.097
10 1.8 18 0.124
18 0.7 12.6 0.087
Solutions to Online Mini-Cases 183
Chapter 24 Mini-Case A
1. Short
af = 1.3 × 0.90 = 1.17]
4. a. $560,000 [= 7,000,000 × 0.08]
5. a. –$3
Because: %ΔNW = –DURgap × Δi/(1 + i) = –2.2 × 0.01/(1 + 0.06) = –0.0207 = –2.07%. Hence,
6. a. 75
Because: Vf = –DURgap × Va/DURf = –150 million × 2.2/4.4 = –75 million
8. Bank is required to show profits or losses from hedges without recognizing offsetting events.
10. [=
β
× (value of portfolio)/(value of contract) = 0.90 × (12 million)/(200,000)]
11. Bank would set up the hedge to offset adverse changes in foreign exchange rates relative to the U.S.
12. (Same general answer as found in question 11 above.) Bank would set up the hedge to offset adverse
changes in foreign exchange rates relative to the U.S. dollar. Gains in futures market would offset losses
184 Mishkin/Eakins • Financial Markets and Institutions, Seventh Edition
Chapter 24 Mini-Case B
1. $7 million/$100,000 = 70
3. a. HR = (7%/6%) × 1.1 = 1.28
b. Contracts = 1.28 × 70 = 89.6
4. The accounting problems created from hedging with financial futures are avoided by removing the
6. a. There is insufficient information to solve for the swap’s duration. However, if we assume the
swap’s duration is –3.3, the rest, b through d, can be solved as follows:
is 3.11%.
e. Approximately zero for a perfect hedge
7. Foreign exchange rate risk may be hedged using currency options, currency swaps, futures contracts
Chapter 26 Mini-Case-Web
2. 50% or $140
4. 3% of assets or $8
6. Company has high real estate loans, bank loans, and commercial paper with low other assets, debt not
elsewhere, and other liabilities.
8. Concentration of services for one-stop centers and increased flexibility in support of customer needs