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

A treasurer wants to hedge a bank's net asset-heavy exposure to rising rates (assets have longer duration than liabilities). Which action using interest rate derivatives is most appropriate?

Enter a pay-fixed, receive-floating swap. It gains when rates rise, offsetting the loss in equity value that comes from assets having longer duration than liabilities. Receive-fixed swaps or long bond futures would increase the exposure.

  1. AEnter a pay-fixed, receive-floating interest rate swapCorrect
  2. BEnter a receive-fixed, pay-floating interest rate swap
  3. CBuy Treasury bond futures
  4. DSell interest rate floors

Explanation

Equity falls when rates rise if asset duration exceeds liability duration. A pay-fixed swap gains value when rates rise, offsetting the loss. Receive-fixed and long bond futures add to the exposure.

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