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

A risk manager wants to capture exposure to non-parallel yield curve movements that single-number duration misses. Which approach is most appropriate?

Key rate durations are the appropriate tool. They measure price sensitivity to a change in yield at specific maturities while holding others fixed, so they reveal exposure to steepening, flattening and curvature changes that a single duration figure assuming a parallel shift cannot capture.

  1. ACompute key rate durations, measuring sensitivity to changes at specific maturitiesCorrect
  2. BUse Macaulay duration in place of modified duration
  3. CIncrease the portfolio's average maturity
  4. DUse only the weighted average coupon rate

Explanation

Key rate durations measure value sensitivity to shifts in individual points on the curve, revealing exposure to twists and curvature changes. Macaulay versus modified duration still assumes a parallel shift. Maturity and coupon do not measure curve sensitivity.

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