Can the FI Immunize Itself from Interest Rate Risk Exposure

question 2

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.

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Definitions:

Definitive Conclusion

A definitive conclusion is a final determination or decision reached based on evidence or data, leaving no room for doubt or ambiguity.

Nominal Data

Data classified into categories that cannot be ordered in a meaningful way. Each category is mutually exclusive.

Gender

Represents a category of either male, female, or other, used to distinguish between biological and social differences in individuals.

Nonparametric Technique

A type of statistical method that does not assume a particular distribution shape for the data, thus making it useful for data that doesn't fit normal distribution models.