Business, 09.12.2021 02:00 aryal191

A small Midwest U. S. bank is worried about potential falling rates that may affect its residential mortgage-backed business. The bank is worried that falling rates may increase the prepayment speeds as homeowners will likely refinance of their mortgage as yields fall. This will likely leave the bank underwriting loans at lower yields. While the bank has other small business and consumer loans, the bank's mortgaged backed security portfolio is $10 million. The average duration of the loans is approximately the same as the ten-year U. S. Treasury note. While the bank is worried about falling rates, it still puts the likelihood of falling rates at 50%.Recommend a derivative strategy to the bank based on the above scenarios. Requirements1. You may use any futures contract or futures option contract. Max futures or futures option expiration of 6 months from today.2. Submit a one-page client letter detailing the contract specifics, number of contracts, and calculations to get to your final recommendation. Make sure your calculations are detailed and correct. I will be grading for exact hedge amounts.3. Comment on why this is a best strategy for the client

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A small Midwest U. S. bank is worried about potential falling rates that may affect its residential...

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