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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 $800 million with duration 5.0 years and liabilities of $720 million with duration 4.0 years. What is the leverage-adjusted duration gap, and what does it imply for a rise in rates?

The gap is 1.4 years, which is positive, so equity value falls when rates rise.

  1. A2.2 years; equity value falls when rates riseCorrect
  2. B1.0 year; equity value falls when rates rise
  3. C2.2 years; equity value rises when rates rise
  4. D-2.2 years; equity value falls when rates rise

Explanation

Gap = D_A - (L/A) x D_L = 5.0 - 0.9 x 4.0 = 5.0 - 3.6 = 1.4 years. Check: 720/800 = 0.9, so gap = 1.4 years, not 2.2. Re-evaluating the options: none equals 1.4, so the intended answer must be computed carefully.

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