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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 non-parallel yield curve moves in a hedge. Which approach is most appropriate?

Key rate durations are appropriate because they measure sensitivity to changes in yields at specific maturities while holding others constant. This lets a manager hedge steepening, flattening or twists, which a single duration number, built on a parallel shift assumption, cannot capture.

  1. AUse key rate durations to measure sensitivity to changes at specific maturitiesCorrect
  2. BUse Macaulay duration instead of modified duration
  3. CIncrease the portfolio's coupon rate
  4. DUse only the weighted average maturity

Explanation

Key rate durations measure price sensitivity to a shift in one point of the curve with other points held constant, allowing hedging of twists and slope changes. Macaulay and modified duration remain single-factor parallel-shift measures. Average maturity ignores cash flow timing and sensitivity.

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