In each of the following cases, conduct the analysis for Step 1 and Step 2 (page 339 in this chapter) in evaluating a hedge. Specifically assess cash market risk and determine whether the bank should buy or sell financial futures as a hedge. Explain how the hedge should work.
a. The bank expects to receive a large, past-due principal payment on a loan in 45 days.
b. A deposit customer notifies the bank that she will be withdrawing $5 million in 60 days. The bank will sell a Treasury security from its investment portfolio at that time to cover the withdrawal.
c. The bank has agreed to make a one-year fixed-rate loan at 6.5 percent. It will fund the loan by issuing four consecutive three-month Eurodollar time deposits. It would like to lock in its borrowing costs on the Eurodollar time deposits.
d. The bank just won a $10 million court settlement against a supplier and will receive the payment in three months.
e. In order to improve the bank’s capital position, management decides to issue 15-year subordinated debentures (bonds). Unfortunately, this debt offering cannot be ready for another five months.
