On Page 27, Book 2 of Schweser, it says (regarding banks and duration), “If managers forecast increasing interest rates, they can decrease the duration of the assets by decreasing the duration of the securities portfolio. If interest rates are expected to decrease, they will increase the duration of the assets.” Why will banks raise asset duration if interest rate decrease and lower asset duration if interest rates increase? -Richard
The higher the duration the higher the impact of an interest change on price. When nterest rates decrease the market value will increase. With a higher duration the market value increase will be higher too. For a interest rate increase you want to lower the duration that the market value will not fall as much.