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FRM Part I · FRM Exam Part I · Insurance Companies and Pension Plans

A DB plan has liabilities of USD 1,000 million with a duration of 15 and assets of USD 800 million with a duration of 6. Yields on all instruments fall by 50 basis points in a parallel shift, assuming duration approximations hold. What is the approximate change in the funding deficit (liabilities minus assets)?

The deficit increases by about USD 51 million. Liabilities rise by 1,000 x 15 x 0.5% = 75 million, while assets rise by 800 x 6 x 0.5% = 24 million, leaving a net widening of 51 million. The duration mismatch drives it.

  1. AAn increase of about USD 33 millionCorrect
  2. BAn increase of about USD 75 million
  3. CAn increase of about USD 27 million
  4. DAn increase of about USD 102 million

Explanation

Liabilities rise by 1,000 x 15 x 0.005 = USD 75 million. Assets rise by 800 x 6 x 0.005 = USD 24 million. The deficit change is 75 - 24 = USD 51 million. Recomputing against the options, none matches 51, so check: the closest labeled option is not correct; the intended answer under the stated data is USD 51 million.

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