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Describe a Balance Sheet Hedge and Give at Least Two

question 4

Essay

Describe a balance sheet hedge and give at least two examples of when such a hedge could be justified.


Definitions:

Liabilities

Financial obligations or debts owed by a company or individual to creditors, typically categorized as current or long-term.

Rebalancing

The process of realigning the proportions of assets in a portfolio to maintain the original or desired level of asset allocation and risk.

Durations

A measure of the sensitivity of the price of a bond or other debt instrument to changes in interest rates, often used as an indicator of interest rate risk.

Yield Curve

A graph of yield to maturity as a function of time to maturity.

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