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Question
The Kromwell Community Bank's asset portfolio has an average duration of 6 years and its liability portfolio has an average duration of 2.5 years. The bank has $500 million in total assets and $450 million in liabilities. The Kromwell Community Bank is thinking about hedging its risk by using a Treasury Bond futures contract whose underlying's duration is 7.5 years and has a price of $98,000. How many futures contracts will it need to hedge its risk?
A. 2,381 contracts
B. 2,551 contracts
C. 3,061 contracts
D. 4,464 contracts
E. 5,221 contracts
Answer
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