Can the FI Immunize Itself from Interest Rate Risk Exposure

question 83

Multiple Choice

Can the FI immunize itself from interest rate risk exposure by setting the maturity gap equal to zero?

• A)Yes, because with a maturity gap of zero the change in the market value of assets exactly offsets the change in the market value of liabilities.
• B)No, because with a maturity gap of zero, the change in the market value of assets exactly offsets the change in the market value of liabilities.
• C)No, because the maturity model does not consider the timing of cash flows.
• D)Yes, because the timing of cash flows is not relevant to immunization against interest rate risk exposure.
• E)No, because a representative bank will always have a positive maturity gap.
• Duration Bank has the following assets and liabilities as of year-end.All assets and liabilities are currently priced at par and pay interest annually.
• \[\begin{array} { | l | r | c | l | r | r | }
• \hline \text { Assets } & \begin{array} { l }
• \text { Amount } \\
• \text { (\$ millions) }
• \end{array} & \begin{array} { l }
• \text { Annual } \\
• \text { Rate }
• \end{array} & \text { Liabilities } & \begin{array} { l }
• \text { Amount } \\
• \text { (\$ millions) }
• \end{array} & \begin{array} { l }
• \text { Annual } \\
• \text { Rate }
• \end{array} \\
• \hline \text { 2-year loans } & \$ 40 & 8 \% & \text { 3-year CD } & \$ 60 & 7 \% \\
• \hline \text { 3-year loans } & \$ 60 & 8 \% & \text { 5-year term deposit } & \$ 30 & 6 \% \\
• \hline & & & \text { Equity } & \$ 10 & \\
• \hline \text { Total } & \$ 100 & & \text { Total } & \$ 100 & \\
• \hline
• \end{array}\] [Reference: 8-113]

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