Final answer:
The market value of equity at risk for a bank is related to the duration mismatch between its assets and liabilities. Given average durations and information on asset and liability categories, a precise calculation requires additional data such as interest rate changes. Generally, longer asset duration versus liabilities leads to increased risk in a rising interest rate environment.
Step-by-step explanation:
The student's question pertains to the calculation of the market value of equity at risk for a bank, given the average duration of its assets and liabilities. To calculate the market value of equity at risk, we need to understand the concept of duration and its impact on a bank's balance sheet, as well as how the difference in durations of assets and liabilities can lead to interest rate risk.
Using the provided information on the bank's assets and liabilities, we would need additional information such as the interest rate change to provide a precise numerical answer to the market value of equity at risk. However, generally speaking, the bank is at risk if interest rates increase, as this would decrease the present value of its longer-duration assets more than its shorter-duration liabilities, reducing the bank's net worth.
To illustrate with an example, let's say a bank has assets with longer durations like 30-year mortgage loans. These are considered assets as they represent payments that the bank will receive over time. However, if the bank's liabilities, primarily customer deposits, can be withdrawn in the short term, there is a duration mismatch. Should interest rates rise, the bank will pay more in interest to depositors while still receiving payments based on lower interest rates set for long-term loans. This mismatch can lead to a decrease in the market value of equity as the present value of assets falls while liabilities may remain relatively stable or even increase if the bank has to pay higher rates on deposits.