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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 wants to immunize its equity against small parallel yield changes. Assets are 800 with duration 5.0, and liabilities are 720 with duration D_L. Which liability duration achieves zero first-order change in equity value?

The liability duration must be about 5.56. Equity is immunized when asset dollar duration equals liability dollar duration: 800 × 5.0 = 4,000, and dividing by liabilities of 720 gives 5.56. Matching durations alone would be wrong because liabilities are smaller than assets.

  1. A5.56Correct
  2. B4.50
  3. C5.00
  4. D6.25

Explanation

Zero equity sensitivity requires asset dollar duration to equal liability dollar duration: 800 × 5.0 = 4,000 = 720 × D_L, so D_L = 5.56. A liability duration of 5.00 would leave assets with larger dollar duration. The 4.50 option inverts the ratio incorrectly.

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