Skip to content

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

A bank has assets of $2,000 million and liabilities of $1,800 million. Asset duration is 2.5 years. Management wants to fully immunize EVE against parallel rate shifts by changing only liability duration. What liability duration is required?

Liability duration must be about 2.78 years. Immunization requires the dollar duration of liabilities to equal that of assets: 2.5 × $2,000m = $5,000m-years, divided by $1,800m gives 2.78 years. Matching the durations at 2.5 would leave a positive gap because liabilities are smaller than assets.

  1. A2.78 yearsCorrect
  2. B2.25 years
  3. C2.50 years
  4. D3.10 years

Explanation

Immunization needs D_A × A = D_L × L, so D_L = 2.5 × 2000 / 1800 = 2.78 years. Using 2.5 ignores leverage; 2.25 multiplies by L/A instead of A/L, the inverted ratio.

Did you get it right without looking?

One question tells you little. A timed set on Risk Management for Changing Interest Rates: Asset-Liability Management and Duration Techniques shows your real accuracy, how long you take and where you lose marks.

Practise Risk Management for Changing Interest Rates: Asset-Liability Management and Duration TechniquesFree diagnostic mock

More Risk Management for Changing Interest Rates: Asset-Liability Management and Duration Techniques questions