Institution has the following Balance Sheet. The rate of return and costs on the
ID: 2798411 • Letter: I
Question
Institution has the following Balance Sheet. The rate of return and costs on the accounts are also given. The Variable Rate securities re-price annually and the Fixed Rate securities havea maturity of 5 years. Non-Earning Assets are PP&E; and Goodwill ASSETS: LIABILITIES & EQUITY: Variable Rate Liabilities at 3% | S 200,000 Fixed Rate Liabilities at 5% Equity TOTAL LIABILITIES & S 920,000 | $ 100,000 Variable Rate Assets at 4% Fixed Rate Assets at 6% Non-Earning Assets 600,000 120,000 120,000 TOTAL ASSETS S 920,000 EQUITY The expected Net Interest Income is S10,000 based on the information above. A 2% increase in all market rates resulted in $8,000 expected Net Interest Income, 2,000 decrease Based on the above information, illustrate the swap the institution should set up to hedge its interest rate risk. What should be the notional amount of this swap contract? a. P.S. With details and equations if it applicable, please. My goal is to understand not only the answer.Explanation / Answer
Assets Income Variable Cost Variable Rate 4% 1,00,000 4,000 4,000 Fixed Rate 6% 7,00,000 42,000 46,000 Liabilities Exp Variable Rate 3% 2,00,000 6,000 6,000 Fixed Rate 5% 6,00,000 30,000 36,000 Interest Income 10,000 -2,000 An increase in the interest rate by 2% Assets Income Variable Rate 6% 1,00,000 6,000 6,000 Fixed Rate 6% 7,00,000 42,000 48,000 Liabilities Exp Variable Rate 5% 2,00,000 10,000 10,000 Fixed Rate 5% 6,00,000 30,000 40,000 Interest Income after increase of 2% rate 8,000 -4,000 Decrease in the profit 2,000 -2,000 Swap Rate 2% increase in the intrest rate decrease the profit by 2000 So each 1% increase in the profiT will decrease the profit by $1000 Notional amount of the swap contract is 100000*4%=4000 4000/3% 133333.3 So swap amount would be 200000-133333=66,667