Skip to content

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

A portfolio manager holds a USD 100m liability due in 10 years and funds it with a barbell of 2-year and 30-year zero-coupon bonds, matching present value and duration (10 years). Which is the best description of the risk?

The barbell remains exposed to non-parallel shifts. Duration matching protects against small parallel moves only, but the 2-year and 30-year yields can move differently from the 10-year yield, so asset value and liability value can diverge after a twist or slope change, despite the higher convexity.

  1. ANo risk, since duration and value are matched
  2. BExposure to a non-parallel shift: a curve steepening or flattening changes asset and liability values differently, and the barbell's higher convexity does not remove thisCorrect
  3. CExposure only to credit risk
  4. DRisk arises only if rates fall

Explanation

Matching value and duration protects only against small parallel shifts. A barbell has cash flows far from the liability date, so twists in the curve (short rates moving differently from long rates) change asset value differently from the 10-year liability. Higher convexity helps for large parallel moves but does not eliminate shape risk.

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