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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