high risk bank has an asset portfolio worth $200 million with a weighted average modified duration...
high risk bank has an asset portfolio worth $200 million with a weighted average modified duration of 1.69, and a $190 million liability portfolio with a weighted average modified duration of 1.21. to perfectly hedge this bank against interest rate risk by adjusting the asset portfolio, what is the target modified duration for the asset?
Homework Answers
To perfectly hedge this bank against interest rate risk by adjusting the asset portfolio in such a way so that the duration gap between assets and liabilities is equal to zero.
The target modified duration for the asset = (Liabilities of portfolio/Assets of portfolio) * weighted average modified duration of liabilities
Where,
Liabilities of portfolio = $190 million
Assets of portfolio = $200 million
Weighted average modified duration of liabilities = 1.21
Therefore,
The target modified duration for the asset = ($190 million/$200 million) * 1.21
= 1.1495
The target modified duration for the asset is 1.1495 to perfectly hedge this bank against interest rate risk.
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