You are in charge of the Asset/Liability management of Raad Bank. The current balance sheet of the bank show the following accounts::

Assets= $1,000,000Liabilities= $800,000

Equity= $200,000

The equity has a duration of 21 years. The duration of assets (D_A) is equal to one and a half time the duration of liabilities (D_L).Both assets and liabilities have aK_dof 10 percent per year.

a.What will be the change in the value of equity when interest rates increases by

40 basis points?

Because equity is exposed to a significant amount of risk, Raad wants to establish

situation, where he desires to put a maximum to the change in the value of equity when interest rates change. He would like the value of equity to change only by 3 percent when the interest rate increases by 50 basis points.

How can you establish situation if you cannot change the original duration of Liabilities. (The duration of assets does not necessarily remain one and a half times the duration of liabilities).