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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 2,000 million with a modified duration of 5.0 and liabilities of USD 1,800 million. The treasurer wants the bank's equity to be immunized against small parallel yield changes. What modified duration of liabilities is required?

The liabilities need a modified duration of about 5.56. Immunizing equity requires asset dollar duration to equal liability dollar duration, so 5.0 times 2,000 divided by 1,800 gives 5.56; the smaller liability base must have a longer duration to compensate.

  1. A5.56Correct
  2. B4.50
  3. C5.00
  4. D6.11

Explanation

Immunization requires D_A x A = D_L x L. So D_L = 5.0 x 2,000 / 1,800 = 5.56. Setting equal durations (5.00) ignores leverage. Multiplying by L/A gives 4.50, the wrong ratio. 6.11 uses an invalid base.

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