Skip to content

FRM Part II · FRM Exam Part II · Risk Management for Changing Interest Rates: Asset-Liability Management and Duration Techniques

A bank's treasurer wants to reduce the sensitivity of net interest income to rising rates. The bank currently funds long-term fixed-rate mortgages with short-term deposits that reprice frequently. Which action most directly reduces this exposure?

Entering a pay-fixed, receive-floating swap is the best action. The bank is liability-sensitive, with fixed asset income and floating funding costs, so receiving floating payments that rise with rates offsets higher deposit costs and reduces net interest income sensitivity.

  1. AEnter a pay-fixed, receive-floating interest rate swapCorrect
  2. BEnter a receive-fixed, pay-floating interest rate swap
  3. CLengthen the maturity of the mortgage portfolio by originating more fixed-rate loans
  4. DShorten the maturity of deposit funding further

Explanation

The bank is liability-sensitive: rising rates raise funding costs while mortgage income is fixed. Paying fixed and receiving floating gives floating receipts that rise with rates, offsetting the higher deposit costs. The receive-fixed swap, longer assets and shorter funding all worsen the mismatch.

Did you get it right without looking?

One question tells you little. A timed set on Risk Management for Changing Interest Rates: Asset-Liability Management and Duration Techniques shows your real accuracy, how long you take and where you lose marks.

Practise Risk Management for Changing Interest Rates: Asset-Liability Management and Duration TechniquesFree diagnostic mock

More Risk Management for Changing Interest Rates: Asset-Liability Management and Duration Techniques questions