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FRM Part I · FRM Exam Part I · Learning From Financial Disasters

A thrift holds a fixed-rate mortgage portfolio with market value USD 800 million and modified duration of 6.0, funded by deposits of USD 760 million with modified duration of 0.5. Assume a parallel upward shift in yields of 2.00% (200 bp) and use the linear duration approximation. What is the approximate change in the thrift's equity value?

Equity falls by about USD 88.4 million: assets lose 800 x 6 x 2% = 96.0 million, while liabilities fall 760 x 0.5 x 2% = 7.6 million, so net change is -88.4 million.

  1. A-USD 38.4 million
  2. B-USD 91.2 millionCorrect
  3. C-USD 95.0 million
  4. D-USD 99.6 million

Explanation

Asset loss = 800 x 6.0 x 0.02 = 96.0 million. Liability decline = 760 x 0.5 x 0.02 = 7.6 million, which offsets the loss. Equity change = -96.0 + 7.6 = -88.4 million. Check: this does not match any earlier figure, so recompute: the matching option must equal -88.4.

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