Any finance majors/pros that can help me out?

Buegie · 07-02-2010, 10:19 PM

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

Quote:

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

CollinsE90 · 07-02-2010, 10:27 PM

yes

Buegie · 07-02-2010, 10:32 PM

Quote:

Originally Posted by CollinsE90

yes

awesome bro, that clears everything up

CollinsE90 · 07-02-2010, 10:35 PM

Quote:

Originally Posted by Buegie

awesome bro, that clears everything up

glad i could help

to clarify, that answer was in the "borat" voice if that helps any

Dan in PA · 07-02-2010, 10:56 PM

Edit: joke fail

Buegie · 07-04-2010, 07:33 PM

somebody has to know this stuff...

Vanity · 07-05-2010, 04:11 PM

Quote:

Originally Posted by Buegie

somebody has to know this stuff...

yea, your prof or TA. go ask them. that is, unless you're doing this question last minute...

08rookie · 07-05-2010, 07:32 PM

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.

07-02-2010, 10:27 PM	#2
CollinsE90 Where my bitches 784 Rep 1,924 Posts Drives: Cadillac coupe deville Join Date: Mar 2009 Location: street corner checking profits iTrader: (0)	yes __________________
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07-02-2010, 10:56 PM	#5
Dan in PA Captain 93 Rep 729 Posts Drives: 2007 E92 335i Join Date: Sep 2008 Location: PA iTrader: (0) Garage List 2013 BMW Z4 sDrive35i [0.00]	Edit: joke fail __________________ 2013 BMW Z4 sDrive35i\|DCT\|M-Sport\|iDrive\|Premium Sound\|Heated Seats\|Comfort Access\|PDC\|Deep Sea Blue\|Cream [At the port of exit awaiting a shipping vessel since 8/17/12] Last edited by Dan in PA; 07-04-2010 at 07:36 PM..
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07-04-2010, 07:33 PM	#6
Buegie Captain 51 Rep 714 Posts Drives: 330xi Join Date: Feb 2008 Location: CT/DC iTrader: (2)	somebody has to know this stuff... __________________ Black Dakota \| Aluminum \| Sport \| Premium \| Cold \| iDrive \| CA
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07-05-2010, 07:32 PM	#8
08rookie Private First Class 192 Rep 123 Posts Drives: bmw Join Date: Jul 2009 Location: phila, pa iTrader: (0)	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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