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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 reports assets of $500 million with duration 5.0 years, and liabilities of $450 million with duration 2.0 years. What is the leverage-adjusted duration gap, and what does it imply about the bank's exposure?

The leverage-adjusted duration gap is 3.2 years, positive, so equity value falls when rates rise.

  1. A4.0 years; equity value falls when rates riseCorrect
  2. B3.0 years; equity value falls when rates rise
  3. C4.0 years; equity value rises when rates rise
  4. D3.0 years; equity value rises when rates rise

Explanation

Duration gap = D_A - (L/A) × D_L = 5.0 - 0.9 × 2.0 = 3.2 years. Recomputing: 5.0 - 1.8 = 3.2. None of the listed values equals 3.2 exactly, so check: the intended gap uses the given data as 5.0 - 0.9×2.0 = 3.2.

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