Can the FI Immunize Itself from Interest Rate Risk Exposure

question 110

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.

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Definitions:

Expected Price

The anticipated cost at which a commodity, asset, or service is thought to be bought or sold in the future.

Diversification

A risk management strategy that mixes a wide variety of investments within a portfolio to minimize the impact of any single asset's performance on overall portfolio returns.

Market Risk

The risk of losses in investments due to factors that affect the overall performance of the financial markets.

Rates of Return

The net gain or loss of an investment over a specified time period, expressed as a percentage of the investment’s initial cost.