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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 $2,000 million with modified duration 3.5 years and liabilities of $1,850 million with modified duration 2.0 years. Equity is $150 million. A parallel rate rise of 100 bp is expected. What is the approximate percentage change in the market value of equity?

Equity falls about 22%: assets lose $70 million, liabilities fall $37 million, net loss $33 million on $150 million equity.

  1. A-27.0%Correct
  2. B-20.0%
  3. C-3.4%
  4. D-33.3%

Explanation

Assets change = -3.5 x 0.01 x 2,000 = -$70 million. Liabilities change = -2.0 x 0.01 x 1,850 = -$37 million. Equity change = -70 + 37 = -$33 million. Percentage = -33/150 = -22.0%. Since this does not match the listed options, the correct figure by this working is -22%.

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