Final Answer:
The weighted average duration of the liabilities of the FI is 3) 5.70 years.
Step-by-step explanation:
The weighted average duration of liabilities is calculated by multiplying the duration of each liability by its proportion of the total liabilities and then summing these values. In this scenario, the weighted average duration of liabilities turns out to be 5.70 years.
This means that considering the varying durations and weights of the liabilities, the average duration is 5.70 years.To compute the weighted average duration, each liability's duration is multiplied by its proportionate weight (the percentage of the total liabilities it represents).
The resulting figures are summed together to arrive at the weighted average duration. A higher weighted average duration implies a longer-term maturity profile of the liabilities held by the financial institution. In this case, 5.70 years reflects the average timing of the FI's liability payments, considering their varying durations and proportions.
This figure is crucial for assessing interest rate risk exposure, as longer durations can amplify the impact of interest rate changes on the FI's liabilities. Therefore, understanding the weighted average duration assists in managing and mitigating potential risks associated with fluctuations in interest rates. Thus, option 3) is correct.