Duration is a less accurate predictor for the change in an FI's net worth in case of large interest rate shocks because it assumes a:
A)linear relationship between the change in an asset or liability's price and the change in the interest rate, while the true relationship is convex
B)linear relationship between the change in an asset or liability's price and the change in the interest rate, while the true relationship is concave
C)convex relationship between the change in an asset or liability's price and the change in the interest rate, while the true relationship is linear
D)concave relationship between the change in an asset or liability's price and the change in the interest rate, while the true relationship is linear

Question

Quizplus · Accepted Answer

Duration assumes a linear relationship between the change in an asset or liability's price and the change in the interest rate, while the true relationship is convex. Therefore, duration is less accurate in predicting the net worth of an FI in case of large interest rate shocks.

Duration Is a Less Accurate Predictor for the Change in an FI's