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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 is asset-sensitive in a repricing-gap sense: more assets than liabilities reprice within one year. Management expects short-term rates to fall and wants to protect net interest income without changing the balance sheet. Which action is most consistent with this objective?

The bank should enter a receive-fixed, pay-floating swap. Being asset-sensitive means income falls when short rates fall, and receiving fixed while paying floating converts part of the floating exposure to fixed, so the swap offsets the lost income.

  1. AEnter a pay-fixed, receive-floating interest rate swap
  2. BEnter a receive-fixed, pay-floating interest rate swapCorrect
  3. CBuy a payer swaption
  4. DSell Treasury futures

Explanation

With more floating-rate assets than liabilities, falling rates reduce income. A receive-fixed, pay-floating swap gains relative to floating rates as they fall, offsetting the loss. Pay-fixed swaps and payer swaptions profit when rates rise, and short Treasury futures also gain when rates rise, so they would worsen the exposure.

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