Duration measures changes in an FI's net worth inaccurately if interest rate changes are large.

Question

Quizplus · Accepted Answer

Duration measures the sensitivity of an FI's net worth to changes in interest rates. However, if interest rate changes are large, duration may not accurately capture the impact on net worth due to nonlinearities in the relationship between changes in interest rates and changes in the value of assets and liabilities. In such cases, other risk measures such as convexity may be more appropriate to assess interest rate risk.

Duration Measures Changes in an FI's Net Worth Inaccurately If