In a Perfectly Matched Hedge of Fixed-Rate Debt Using an Interest

question 8

Multiple Choice

In a perfectly matched hedge of fixed-rate debt using an interest rate swap, the effect of a change in fair value of the derivative on the income statement

• A)is always a gain
• B)may be a gain or a loss
• C)is zero
• D)is always a loss

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Definitions:

Diversifiable Risk

A type of investment risk that can be reduced through diversification of a portfolio across different assets, sectors, or geographical locations.

Unique Risk

Risk that is specific to an individual asset or company, which can be mitigated through diversification.

Firm-Specific

Refers to risk or information that is unique to a particular company and not related to the market or industry.

Covariance

A measure used to determine how two variables change together, indicating the direction of the relationship.