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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 immunize the net worth of a bank against small parallel shifts in interest rates. Which condition on the balance sheet achieves this under the duration model?

Net worth is immunized when the duration gap is zero, meaning asset duration equals liability duration adjusted for the liabilities-to-assets ratio. Then small parallel yield changes move assets and liabilities by equal dollar amounts, leaving equity unchanged.

  1. AEqual dollar amounts of assets and liabilities repricing within one year
  2. BA duration gap of zero, so asset duration equals leverage-adjusted liability durationCorrect
  3. CAsset duration equal to liability duration regardless of leverage
  4. DZero convexity on the asset side only

Explanation

Equity value change is proportional to the duration gap, DA - (L/A)DL. Setting it to zero makes net worth insensitive to small parallel shifts. Equal raw durations leave a gap when leverage exists.

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