Suppose you are a bank manager. Interest rates for lending are currently at 4.5%
ID: 1175422 • Letter: S
Question
Suppose you are a bank manager. Interest rates for lending are currently at 4.5% and borrowing at 3.8%. You strongly interest rates will rise in the next six month and the new lending rate will increase to 4.8%, while the new borrowing rate will increase to 4.25% Use the Maturity Buckets below to answer the following questions: Assets Liabilities Maturity Bucket +1 Day to 3-Months +3 Months to 6 Month +6 Months to 12 Mont +1 year to 5 Years 600 475 320 410 745 590 150 30 How should the bank manager adjust the bank's six-month repricing gap to take advantage of this anticipated rise? a. b, what if the manager believed rates would fall to 4.25% (lending) and 3.6% (borrowing) in the next six months?Explanation / Answer
A. Since the manager anticipates that after 6 months both lending and borrowing rates will increase, the manager should try to lower its liabilites and try to increase its investments.or enter into forward agreement to borrow at pre determined rate which should not exceed 4.10% (Net gain = 4.80 - 4.10 = 0.70 = 4.50 - 3.80).
B. If the manager believes that rates will fall, then he may enter into a forward contract of lending at a rate not less than 4.30%.