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      07-02-2010, 09:19 PM   #1
Buegie
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Any finance majors/pros that can help me out?

Okay, I'm having some trouble with this question, any help from any of the finance guys on here would be greatly appreciated.

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Assume that a bank will institute a micro hedge against a portfolio of three proposed loans financed by a combination of pure discount 2-year and 5-year CDs. The loans are given by the table below.

1-year discount loan...........................$10,000
3-year 10% loan; semi-annual pmts......$25,000
5-year 10% loan; annual pmts..............$50,000

Determine the funding allocation between the 2-year and 5-year CDs.
I'm thinking I need to use this formula:

DG=DA-(MVL/MVA)*DL

Where DG is the duration gap, DA is the average duration of the assets, MVL is the market value of liabilities, MVA is the market value of the assets, and DL is the average duration of the liabilities.

For the CDs and the discount loan, the durations equal the maturities. For the 3-year loan I figured the duration to be 2.66 years? And for the 5-year, I figured it to be 4.17 years?

I'm assuming I need to set DG to zero but I don't know how to find the weighted averages for for the assets (loans) or the liabilities (CDs). Is MVA just going to be $10,000? So I'm going to be solving for MVL but once I get a number for it how am I going to divide it up between the two different CDs?

Keep in mind I need to show the calculations for this so anybody trying to help should write out the steps involved. I'm hoping somebody who knows this stuff can fly through it and help me out, it would definitely be appreciated. Thanks guys
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      07-02-2010, 09:27 PM   #2
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yes
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      07-02-2010, 09:32 PM   #3
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Quote:
Originally Posted by CollinsE90 View Post
yes
awesome bro, that clears everything up
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      07-02-2010, 09:35 PM   #4
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Quote:
Originally Posted by Buegie View Post
awesome bro, that clears everything up
glad i could help

to clarify, that answer was in the "borat" voice if that helps any
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      07-02-2010, 09:56 PM   #5
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Last edited by Dan in PA; 07-04-2010 at 06:36 PM.
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      07-04-2010, 06:33 PM   #6
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somebody has to know this stuff...
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      07-05-2010, 03:11 PM   #7
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Quote:
Originally Posted by Buegie View Post
somebody has to know this stuff...
yea, your prof or TA. go ask them. that is, unless you're doing this question last minute...
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      07-05-2010, 06:32 PM   #8
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no...MVA should equate to roughly 7,500

think about annuities. if you have a 4 yr annuity at a .75 rate your MVA should be 7500 right? same rules apply...just carry the one over the adjusted rate. your discount remains the same.
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