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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 USD 1,000 million with a modified duration of 4.0 and liabilities of USD 900 million with a modified duration of 3.0. Using the duration gap approach, approximately what is the change in the market value of equity if all yields rise by 50 basis points?

Equity value falls by about USD 6.5 million. Asset dollar duration is 4,000 and liability dollar duration is 2,700, a net 1,300; multiplying by the 0.5 percent yield rise gives a loss of 6.5 million because assets lose more value than liabilities.

  1. ADecrease of USD 6.5 millionCorrect
  2. BDecrease of USD 13.0 million
  3. CIncrease of USD 6.5 million
  4. DDecrease of USD 5.0 million

Explanation

Change in equity = -(D_A x A - D_L x L) x dy = -(4,000 - 2,700) x 0.005 = -1,300 x 0.005 = -6.5 million. Ignoring the 0.5% scaling (using 1%) gives 13.0. Increase has the wrong sign. Using only the asset effect adjusted incorrectly gives other figures.

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