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 $500 million and a leverage-adjusted duration gap of 2.0 years. Current yields are 5% (annual compounding). Using the approximation ΔE ≈ −DGap × A × Δy/(1+y), what is the estimated change in economic value of equity if yields fall by 50 basis points?

Equity rises by about $4.76 million. With a positive duration gap of 2.0 years on $500 million of assets, a 0.5% yield fall gives 2.0 × 500 × 0.005 = 5.0, which is then divided by 1.05 to adjust for compounding.

  1. A-$4.76 million
  2. B+$5.00 million
  3. C+$4.76 millionCorrect
  4. D+$4.55 million

Explanation

ΔE = −2.0 × 500 × (−0.005)/1.05 = +5.0/1.05 = +$4.76 million. The +$5.00 million answer omits division by (1+y). The negative sign option ignores that falling rates benefit a positive-gap bank.

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