A FI manager receives information from an economic forecasting unit that interest rates are expected to rise from 10 percent to 11 percent over the next year. The FI manager wants to calculate the potential loss to the FI’s net worth (E) if the forecast of rising rates proves to be true.

Suppose: Duration of assets D A = 4 years,

Duration of liabilities D L = 3 years

Assets A = $100 million

Liabilities L = $ 80 million

1- Calculate the change in FI Net Worth as interest rates rise?
2- Propose a detailed solution of how the FI manager can take a fully hedging position?