2016-FRR Exam Dumps | Banks duration match their assets and liabilities to manage their interest risk in their banking book.

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Financial Risk and Regulation (FRR) Series
GARP.2016-FRR.v2024-09-09.q145
Question 23

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Question 23/145

Banks duration match their assets and liabilities to manage their interest risk in their banking book. Currently, the bank's assets and liabilities both have a duration of 10. To hedge against the risk of decreasing interest rates, the bank should
I. Increase the duration of the liabilities
II. Increase the duration of the assets
III. Decrease the duration of the liabilities
IV. Decrease the duration of the assets

A. I only.

B. I and II.

C. II and III.

D. I and IV

Correct Answer: D

To hedge against the risk of decreasing interest rates, a bank should look to reduce the duration of its assets or increase the duration of its liabilities. Decreasing the duration of assets makes them less sensitive to interest rate changes, while increasing the duration of liabilities does the same on the liability side. The bank currently has both assets and liabilities with a duration of 10, so it should decrease the duration of its assets and/or increase the duration of its liabilities to hedge against decreasing interest rates.

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