Problem
What is the number of T-bond futures contracts necessary to hedge the balance sheet if the duration of the deliverable bonds is 7 years, the current price of the futures contract is $102 per $100 face value, the average duration of the loans is 8 years, the average duration of the deposits is 4 years, total asset value is $250 million, and liability value is $150 million? Basis risk shows that for every 1 percent shock to interest rates, the implied rate on the deliverable bonds in the futures market increases by 0.96 percent.