The Statement That a Portfolio Is Immunised Using Duration Matching

question 31

Multiple Choice

The statement that a portfolio is immunised using duration matching:

• A)means that the FI is entirely hedged against interest rate risks
• B)is misleading as duration matching is a dynamic process and only hedges the FI against instantaneous interest rate changes
• C)is misleading as duration matching is a dynamic process and only hedges the FI against interest rate changes that occur within a month
• D)None of the listed options are correct.

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Definitions:

Yield

The income return on an investment, such as the interest or dividends received, often expressed as an annual percentage based on the investment’s cost, current market value, or face value.

CAPM Approach

The Capital Asset Pricing Model, a formula used to determine the expected return on investment (ROI) by correlating the risk and expected return.

Cost of Equity

The return that shareholders require or expect to earn on their investment in the company, considered as the company's cost of retaining and using equity capital.

CGT

Capital Gains Tax, which is a tax on the profit realized on the sale of a non-inventory asset.