Suppose Metro Bank's asset portfolio has a market value of $1B and a duration of 2 scars and its portfolio of liabilities has a market value of $900M and a duration of 3 years. The current interest rate is 5%.
What would be Metro's loss or gain if interest rates fall by 100bp? How would you reduce Metro's exposure to interest rate risk? Reason.
Specify the formulas you use. Specify the units of the variables you measure. Explain how your recommendation would reduce interest rate risk exposure.