Banks duration match their assets and liabilities to manage their interest risk in their banking book. A bank has $100 million in interest rate sensitive assets and $100 million in interest rate sensitive liabilities. Currently the bank's assets have a duration of 5 and its liabilities have a duration of 2. The asset-liability management committee of the bank is in the process of duration-matching.
Which of the following actions would best match the durations?
- Increase the duration of liabilities by 2 and increase the duration of assets by 1.
- Increase the duration of liabilities by 2 and decrease the duration of assets by 1.
- Decrease the duration of liabilities by 1 and increase the duration of assets by 1.
- Decrease the duration of liabilities by 1 and decrease the duration of assets by 1.