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FRM Part II · FRM Exam Part II · Risk Management for Changing Interest Rates: Asset-Liability Management and Duration Techniques

A bank has assets of $1,000 million with duration 5.0 and liabilities of $900 million. The bank wants to fully immunize the market value of equity against small parallel yield changes. What must be the duration of the liabilities?

Liability duration must be about 5.56 years. Equity is immune to small parallel shifts when asset dollar duration equals liability dollar duration, so D_L = 5.0 x 1,000 / 900. Matching durations alone would ignore the bank's leverage.

  1. A5.56Correct
  2. B4.50
  3. C5.00
  4. D6.17

Explanation

Immunizing equity requires D_A x A = D_L x L. So D_L = 5.0 x 1000 / 900 = 5.56. Setting D_L = 5.0 would leave a leveraged exposure; 4.50 wrongly scales by L/A.

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