1. Suppose the balance sheet of the bank is the following one:
Assets: mortgage 2 years zero-coupon 100 USD (rate 4%, convexity: 25)
Liabilities and equity: Deposits 1 year zero coupon 75 USD (rate 2.5%, convexity and equity 25 USD
Estimate the impact of a 25 bps increase on the bank value applying the convexity gap approach.
